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By Pete Hill
The fact that the finance industry is having troubled times at the moment is not news, unless you have been totally incommunicado for the last few months. We have had all the economic experts tell us that before we invest we should do our own research, take nothing at face value etc, etc. But how many ‘ma & pa’ investors would have invested in a finance company that wrote its prospectus in simple, plain English?
Economist Brent Wheeler( www.brentwheeler.com) has some interesting thoughts on this matter, and I would like to share some of them here.
Prospectus Term – ‘First Ranking’
First this is simply incorrect. The receivers get their fee long before they get their man or give money back to anyone. Then there is the IRD and employees both of whom commonly feature before debenture holders
Plain English Version: “several people have claims on the cash the company has. Its like a queue. Your place in the queue is, by law, certainly ahead of the owners of the business and some other borrowers but you only get what is left after everyone ahead of you in the queue gets their money. If the company fails or goes into receivership there is a good chance that will be less than what you invested."
Prospectus Term – "secured".
Another misleading expression. Like a super tanker, if the wharf you are secured to is built on quicksand, the security is worth nothing in a storm.
Plain English Version: “If borrowers stop paying off their loans and we start to run out of cash we can sell the borrowers houses or cars or other assets and that should be enough to cover what you have invested so long as their assets are still worth something."
Prospectus Term – "liquidity"
This, along with all related terms such as "liquidity carried" or "liquidity ratio" is high jargon and means little.
Plain English Version: "enough cash in the bank to be able to cover at the very least (1) the companies bills as they become due and (2) to be able to pay back investors as their investments mature, and (3) some left over for the unexpected."
Prospectus Term – “equity"
Also include here "equity ratio breach", "in excess of the required equity ratio" and so on. More confusion - especially since a number of people think the term "equity" has something to do with "fairness".
Plain English Version: "a spare reserve of cash or assets which can be very quickly sold for cash which we can rely on to protect your investment if borrowers stop paying their loans off".
Makes you think, doesn’t it?
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