• 454 Posts
Joined 2 years ago
Cake day: May 10th, 2022


  • Just stumbled upon this:

    Academic calls for upgrade to sewage systems to protect health

    The risk to public health from human faeces in our [UK] rivers and seas will increase without action to create a wastewater system fit for the future, according to Professor Barbara Evans, Leeds’ Professor of Public Health Engineering at the University of Leeds.

    The report [led by Professor Evans]says collective action by industry, government, public bodies and the general public is required. It makes 15 recommendations, including: review current bathing water regulations; prioritise maintenance of the existing sewage network; return to collecting widespread data on faecal bacteria; develop a long-term strategy for better designing cities to reduce flooding, and the appointment of a dedicated wastewater champion.

    Here is the report (pdf).

  • “we have these “assets” but we aren’t going to tell you what they are because we don’t have to”

    Yes, this is exactly what off-balance sheet, OBS for short, means.

    Suppose a company has a line of credit at the bank of, say, 1,000,000 dollars, but the credit line comes with a financial covenant stating that the debt-equity-ratio must not exceed 0.5, meaning that the company’s total debt must not exceed half the company’s equity at any point of time.

    Suppose now the company wants to buy a new machine on credit, but the costs for this new asset would violate the covenant rule. So the company founds a subsidiary. The subsidiary would then buy the machine to immediately lease it back to the parent company. As the parent company doesn’t legally own the machine, it is not on its balance sheet, meaning the debt-to-equity ratio is fine, but it can control and use the asset (the machine) as it is the company’s subsidiary’s asset.

    The company now pays leasing fees (instead of interest rates, had it bought the machine directly on credit), which, of course, stresses its liquidity (very much as it would be in case of a direct credit).

    So OBS assets can technically improve ratios, but they are hard to analyze and assess (but they can deceive shareholders and other stakeholders, including authorities, by conveying a higher solvency and liquidity than they actually have).

    Large companies and banks have many opportunities to create such OBS. They often create so-called Special-Purpose Vehicles (SPVs) following a similar approach as in our small example. Banks can also move assets through securitization, leaseback agreements, accounts receivables, derivatives.

    Don’t get me wrong, there are good reasons to use this tool, but if and when you overdo it, you may not know yourself what risks your entire business actually bears. It becomes incalculable.

    And if then, say, you can’t pay back a small loan because investment A went wrong, then investment B that has initially nothing to do with A may also suffer, which then effects C …

    [Edit typo.]