Your community gets a B-: analysis of the specific and curious realm of airport bond rating

Commercial airports are publicly-owned transportation infrastructure, usually funded with bonds. The bond rating decision for these entities thus has important ramifications for bond investors, issuers, airport managers, and even the communities the airports serve, but the rating decision process is not well understood. This paper discusses a simulation of the rating process in two decision environments, including a downgrade. The effect of information framing in an environment of incomplete data is examined using amateur evaluators. Amateur evaluators were utilized to understand how people with limited financial analysis skills would respond when presented with incomplete information and a primed scenario. The results indicate that amateur evaluators were more likely to downgrade a bond grade than a ratings agency, but this effect was moderated for amateur evaluators with more work experience. Implications for airport and supply chain infrastructure are discussed

Supply chain finance: optimal introduction and adoption decisions

Supply chain finance (SCF) can improve supply chain performance by facilitating longer payment terms for buyers and better access to financing for suppliers. In spite of these clear benefits, there is empirical evidence for some hesitation and resistance to SCF adoption, manifesting in an often substantial time lag between a buyer's introduction of SCF and its adoption by all targeted suppliers. Observed adoption processes often resemble the s-shaped Bass-curve suggesting that successful early adoptions support adoption decisions by other suppliers. Based on these observations, we consider supplier SCF adoption decisions within a diffusion model, to obtain insights regarding a buyer's optimal SCF introduction decisions in terms of timing and payment terms. We find that initial payment terms and procurement volume strongly affect the optimal timing of SCF introduction and optimal payment term extensions. The degree to which the buyer can influence suppliers in their adoption decisions affects the optimal introduction timing, but not optimal payment terms. Interestingly, our results suggest that, in spite of the clear benefits, many buyers might be well-advised to postpone their SCF implementations

ADB–OECD Study on Enhancing Financial Accessibility for SMEs: Lessons from Recent Crises

During the era of global financial uncertainty, stable access to appropriate funding sources has been much harder for small and medium-sized enterprises (SMEs). The global financial crisis impacted SMEs and entrepreneurs disproportionately, exacerbating their traditional financing constraints. The financial conditions of many SMEs were weakened by the drop in demand for goods and services and the credit tightening. The sovereign debt crisis that hit several European countries contributed to further deterioration in bank lending activities, which negatively affected private sector development. The global regulatory response to financial crises, such as the Basel Capital Accord, while designed to reduce systemic risks may also constrain bank lending to SMEs. In particular, Basel III requires banks to have tighter risk management as well as greater capital and liquidity. Resulting asset preference and deleveraging of banks, particularly European banks with significant presence in Asia, could limit the availability of funding for SMEs in Asia and the Pacific. Lessons from the recent financial crises have motivated many countries to consider SME access to finance beyond conventional bank credit and to diversify their national financial system. Improving SME access to finance is a policy priority at the country and global level. Poor access to finance is a critical inhibiting factor to the survival and growth potential of SMEs. Financial inclusion is thus key to the development of the SME sector, which is a driver of job creation and social cohesion and takes a pivotal role in scaling up national economies. The Asian Development Bank (ADB) and the Organisation for Economic Co-operation and Development (OECD) have recognized that it is crucial to develop a comprehensive range of policy options on SME finance, including innovative financing models. With this in mind, sharing Asian and OECD experiences on SME financing would result in insightful discussions on improving SME access to finance at a time of global financial uncertainty. Based on intensive discussions in two workshops organized by ADB in Manila on 6–7 March 2013 and by OECD in Paris on 21 October 2013, the two organizations together compiled this study report on enhancing financial accessibility for SMEs, especially focusing on lessons from the past and recent crises in Asia and OECD countries. The report takes a comparative look at ADB and OECD experiences, and aims to identify promising policy solutions for creating an SME base that is resilient to crisis, from a viewpoint of access to finance, and which can help drive growth and development

The future of securitization

Securitization is a financial innovation that experiences a boom-bust cycle, as many other innovations before. This paper analyzes possible reasons for the breakdown of primary and secondary securitization markets, and argues that misaligned incentives along the value chain are the primary cause of the problems. The illiquidity of asset and interbank markets, in this view, is a market failure derived from ill-designed mechanisms of coordinating financial intermediaries and investors. Thus, illiquidity is closely related to the design of the financial chains. Our policy conclusions emphasize crisis prevention rather than crisis management, and the objective is to restore a “comprehensive incentive alignment”. The toe-hold for strengthening regulation is surprisingly small. First, we emphasize the importance of equity piece retention for the long-term quality of the underlying asset pool. As a consequence, equity piece allocation needs to be publicly known, alleviating market pricing. Second, on a micro level, accountability of managers can be improved by compensation packages aiming at long term incentives, and penalizing policies with destabilizing effects on financial markets. Third, on a macro level, increased transparency relating to effective risk transfer, risk-related management compensation, and credible measurement of rating performance stabilizes the valuation of financial assets and, hence, improves the solvency of financial intermediaries. Fourth, financial intermediaries, whose risk is opaque, may be subjected to higher capital requirements

Impact Investments: An Emerging Asset Class

Examines the impact investment market landscape, what makes it an emerging asset class, expectations for financial returns, estimates of potential investment opportunities in specific sectors, and risk management and performance monitoring issues

Sri Lanka Social Enterprise Needs Assessment and Advisory

Authored in collaboration with Oxfam, this research maps social enterprises within the agriculture sector, identifies the key challenges they face, and makes recommendations for donors and development agencies looking to support the space in Sri Lanka. Findings and recommendations developed based on secondary research and field survey of social enterprises in Sri Lanka

Between Efficiency and Resilience: The Classification of Companies According to their Sustainability Performance

In this article, we provide a broad picture of the adaptation of economic classification technologies that were originally used to provide financial information and to classify companies according to their financial performance. The same approach is now available for the benefit of sustainability investors. The adaptation of such financial classification technologies to account for questions of sustainability has been engendered by the growing importance of financial markets and by the recognition of sustainability, as a guiding concept for contemporary societies. Since credit ratings, as well as financial accounting and reporting, are established measures for financial performance, they have inspired the development of similar classification systems for sustainability performance, and can be used to accommodate sustainability investors. We outline the adaptation of financial classification systems to the issue of sustainability and we compare the development and institutionalization, especially as it relates to the current market structure of classification systems in the financial markets, based on both financial and sustainability data. In the second part of this paper we compare the interpretation of social sustainability by three different sustainability accounting and reporting initiatives, in order to illustrate the heterogeneity of the available data applicable to subsequent classification. We point out that the operationalization of the three initiatives differs in respect to the nature and the extent of information requested. While accounting frameworks require relatively few quantitative outcomes, reporting frameworks demand more extensive quantitative and qualitative data. Finally, we discuss the opportunities and difficulties associated with the adaptation of classification systems from the field of finance to the field of sustainability