Lets get to the basics of the basics….
What does the market trade?
Ok I will not make you wait for too long. Here is the answer – market trades information. Simple. I think Coromandel International is a good buy at 170, somebody thinks it is a good sell (I am writing this on 1st Sep, 2013) at the same price. Now 6 months later either me or the seller will be right.
Thus we are both TRADING information.
Information is a brilliant thing to trade. Let us say Orbit Realty had raised lots of money from the equity markets (by way of equities at a premium) and debt markets (by way of listed bonds).
Let us say Orbit raised Equity money at Rs. 150 and it also raised debt at 9% p.a. for a face value of Rs. 100….
And they invest in a project in Mumbai…..and then we hear stories that the project is doing well. Then we hear that the project is doing badly. The equity share goes up to Rs. 175 and the bond prices remain at Rs. 100.
Then the interest rates go up to say 11% – and the Orbit bond prices FALL – to say Rs. 90 to adjust for the interest rate changes.
One day we hear stories of how the project is stuck – and the equity share price falls to Rs. 122.
Then the company defaults – it does not pay interest for one quarter. All hell breaks lose. The rating agency downgrades it, and the bond prices fall to Rs. 70 – the RISK is factored in. The share price falls to Rs. 95 in keeping with the sentiment.
Cut to reality. Nobody wants bonds – bonds quickly who is NAKED. The world will know that YOU have defaulted. Your bonds and equities quote at a discount.
Orbit obviously borrows from ‘friendly’ banks and financial institutions. They are happy to evergreen their books (environmental friendly people!!).
So even if the project is doing badly, there is no cash flow, ….etc. YOU and I will never know how the debt portion is doing. We will never know that the flats are not selling (banks do not want you to know all this inconvenient facts)….
However, the market is smart. It is brilliant. It takes the share price to Rs. 10 – telling you SOMETHING about the shitty way how the business is being done.
I have no clue whether the project is doing well or there is evergreening by the lending institutions. I know one thing – the equity share price is at Rs. 10-13. If the debt were listed, it would be quoting at Rs. 30. God bless the man who thinks markets do not know whats happening.
Wake up Raghuram Rajan FORCE people borrowing more than Rs. 100 crores to go and issue bonds. We will know where your banks stand.
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