Redlands community leaders at forefront of Child Abuse Prevention Month

by Shelton on May 2nd, 2014

filed under Personal Funding

Before a presidential proclamation in 1983 designated April as National Child Abuse Prevention Month, efforts were under way in Redlands to address the problem.

In 1980, former City Councilwoman Barbara Riordan opened her home for a meeting led by Childhelp International co-founders Sara O#x2019;Meara and Yvonne Fedderson. The estimated attendance of 40 swelled to 150, and the Inland Empire Chapter of Childhelp grew out of it. The non-profit strives to prevent and interrupt child abuse in all of its forms.

Peggy Brier, Redlands 2012 Woman of the Year, attended that meeting and has been a member of Childhelp#x2019;s Inland Empire Chapter ever since.

The members of this and other local chapters across the country support the work of Childhelp International programs via fundraising and awareness activities. Brier also serves as the Abuse Prevention Chairwoman on Childhelp#x2019;s Western Regional Coordinating Council.

#x201c;It#x2019;s just a great organization,#x201d; she said. #x201c;They try to heal the families if they can. If they can#x2019;t, then the children go into foster care or they adopt the children out.#x201d;

That is accomplished partly through Childhelp#x2019;s Foster Family and Adoption Agency in Redlands. Brier called the agency #x201c;a feather in Redlands#x2019; cap.#x201d;

Current City Councilwoman Pat Gilbreath explained why she supports Childhelp: #x201c;In my mind,#x201d; she said in a phone interview, #x201c;it provides a very needed service to abused children when they desperately need services. They are given counseling and basically helped to get back their self-esteem. Childhelp is a very needed organization, and deserving of consideration for both personal funding and grant-oriented funding.#x201d;

Recently, members of the Redlands Council of PTAs listened to a national representative from Childhelp, Andrea Dunlap, as she presented Childhelp#x2019;s low-cost, research-based, computer-based school curriculum called Speak Up, Be Safe. The lessons involve parents and teachers in educating kids about how to protect themselves from child abuse, bullying, and Internet and sexting victimization.

Superintendent of Redlands Unified School District Lori Rhodes, who attended the meeting, encouraged members of the council to begin implementing the program in small ways at first, pointing out the district#x2019;s history of including parents in such efforts.

Newly elected State Sen. Mike Morrell issued a written statement on Thursday: #x201c;It#x2019;s a tragic reality in today#x2019;s world that so many innocent children continue to be victims of abuse and neglect. As a community, we need to embrace these kids and provide them with loving and safe environments where they can begin to heal.#x201d;

According to Childhelp, there are an estimated 3 million reports of child abuse being made annually in the United States, and from 4 to 7 American children dying every day from child abuse and neglect.

The Inland Empire Chapter will participate with members of the United States legislature as they pray at lunchtime on Wednesday, Childhelp#x2019;s National Day of Hope for abused children.

To report suspected abuse, or get advice on how to respond if you think a child is being abused, call Childhelp#x2019;s confidential, anonymous hotline at 1-800-4-A-CHILD (1-800-422-4453). Their professional crisis counselors offer guidance and support throughout the United States and its territories in 170 languages. All calls are confidential and anonymous.

Drivers Now Get Instant Approval on Bad Credit Auto Loans With Zero Money …

by Shelton on May 2nd, 2014

filed under Car Lending

Drivers Now Get Instant Approval on Bad Credit Auto Loans With Zero Money Down Through Trusted Car Financing Resource Complete Auto Loans
Car shoppers who’ve been turned down for a loan in the past can now get approved through America’s favorite car lending network, “Complete Auto Loans”.

Petroleo Brasileiro S.A.: A Gloomy Bond Market Update

by Shelton on May 2nd, 2014

filed under Below Average Credit

This is our second analysis of Petroleo Brasileiro SA (Petrobras) (PBR) (OTC:PBRQF), the largest company in the southern hemisphere by market capitalization and the largest company in South America by revenues. The Petroleo Brasileiro SA investor information website explains the firms worldwide operations in detail. Our previous analysis was done in October 2013. In this note, we turn to the US dollar bonds issued by Petroleo Brasileiro SA affiliate Petrobras International Finance Co., which is guaranteed by the parent. Later in the post, we include a relative value analysis of another affiliate, Petrobras Global Finance BV, which is also guaranteed by the parent. We seek to bring a bond market perspective to the outlook for Petroleo Brasileiro SA as a complement to analysis based on a common stock holders perspective. Todays note incorporates Petroleo Brasileiro SA bond price data as of April 29, 2014. A total of 279 trades were reported on 12 fixed-rate non-call senior bond issues of Petrobras International Finance Co. Total trading volume was $142 million. We used all of this data in this note.

Conclusion: We believe that sophisticated analysts would narrowly rank Petroleo Brasileiro SA as a non-investment grade company. The legacy rating agencies are notorious for their positive bias with respect to large firms and for their lagged response to changing circumstances. The 10-year default probability outlook of Petroleo Brasileiro SA ranks in the worst half of its peer group, and the percentile ranking has dropped substantially in the last 6 months. The bonds of Petrobras Brasileiro SA trade at a below average credit spread to default probability ratio. We believe that the market-based peer group comparisons correctly show that Petroleo Brasileiro S. A. is risky compared to its peers and that only investors with a large risk appetite are likely to feel comfortable with this name in their portfolio.

The Analysis

Institutional investors around the world are required to prove to their audit committees, senior management, and regulators that their investments are in fact investment grade. For many investors, investment grade is an internal definition; for many banks and insurance companies investment grade is also defined by regulators. We consider whether or not a reasonable US bank investor would judge Petroleo Brasileiro SA to be investment grade under the June 13, 2012 rules mandated by the Dodd-Frank Act of 2010, which states that legacy credit ratings alone are no longer sufficient to establish that a bond issuer is investment grade.

Assuming the recovery rate in the event of default would be the same on all bond issues by the same issuer for the same seniority, a sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis. In this note, we also analyze the maturities where the credit spread/default probability ratio is highest for Petroleo Brasileiro SA

Term Structure of Default Probabilities

Maximizing the ratio of credit spread to matched-maturity default probabilities requires that default probabilities be available at a wide range of maturities. The graph below shows the current default probabilities for Petroleo Brasileiro SA ranging from one month to 10 years on an annualized basis. For maturities longer than ten years, we assume that the ten-year default probability is a good estimate of default risk. The current default probabilities, shown in green, range from 0.74% at one month (up 0.13% from October 2013) to 0.44% at 1 year (up 0.12%) and 0.55% at ten years (up 0.16%). The default probabilities prevailing on October 29, 2013 are shown in orange.

(click to enlarge)

We also explain the source and methodology for the default probabilities in Instablogs posted daily on Seeking Alpha.

Summary of Recent Bond Trading Activity

The National Association of Securities Dealers launched the TRACE (Trade Reporting and Compliance Engine) in July 2002 in order to increase price transparency in the US corporate debt market. The system captures information on secondary market transactions in publicly-traded securities (investment grade, high yield and convertible corporate debt) representing all over-the-counter market activity in these bonds. We used the 12 bond issues mentioned above in this analysis.

The graph below shows 6 different yield curves that are relevant to a risk and return analysis of Petroleo Brasileiro SA bonds. These curves reflect the noise in the TRACE data, as some of the trades are small odd-lot trades. The lowest curve, in dark blue, is the yield to maturity on US Treasury bonds (TLT)(TBT), interpolated from the Federal Reserve H15 statistical release for that day, which matches the maturity of the traded bonds of the Petroleo Brasileiro SA The next curve, in the lighter blue, shows the yields that would prevail if investors shared the default probability views outlined above, assumed that recovery in the event of default would be zero, and demanded no liquidity premium above and beyond the default-adjusted risk-free yield. The orange line graphs the lowest yield reported by TRACE on that day on Petroleo Brasileiro SA bonds. The green line displays the value-weighted average yield reported by TRACE on the same day. The red line is the maximum yield in each Petroleo Brasileiro SA bond issue recorded by TRACE. The black dots and connecting black line show the yield curve that would prevail if a cubic polynomial is fitted to the trade-weighted credit spreads for Petroleo Brasileiro SA

The graph shows an increasing liquidity premium as maturity lengthens for the bonds of Petroleo Brasileiro SA This is a pattern seen usually with firms of average to good credit quality. We explore this premium in detail below.

(click to enlarge)

The high, low and average credit spreads at each maturity are graphed below for Petroleo Brasileiro SA, along with the fitted credit spreads in black. We have done nothing to smooth the data reported by TRACE, which includes both large lot and small lot bond trades.

(click to enlarge)

Using default probabilities in addition to credit spreads, we can analyze the number of basis points of credit spread per basis point of default risk at each maturity. For Petroleo Brasileiro SA, the credit spread to default probability ratio ranges from 2.2 to 4.7 times at maturities under 3 years to a range generally between 4.8 and 5.9 times at longer maturities. These ratios are substantially lower than those found on October 29, 2013. The ratios of spread to default probability for all traded bond issues are shown here:

(click to enlarge)

The data from October 29, 2013 is reproduced in this chart:

(click to enlarge)

The credit spread to default probability ratios are shown in graphic form below for Petroleo Brasileiro SA in this chart:

(click to enlarge)

Using the bond data above, we can extract the continuously compounded yield on a promise by the company to pay $1 at any date in the future. As the graph shows, these yields are substantially higher than a similar promise by the US government. We do not mean to imply that a promise by the US government (or any other government) will be kept. That is the subject of other notes in this series.

(click to enlarge)

Relative Value Analysis

Are the credit spread to default probability ratios for Petroleo Brasileiro SA good, bad, or average? The only sophisticated answer to that question is based on hard facts from the current bond market. For that reason, we first look at a histogram for all bond issues that traded on April 29, 2014 in volume of more than $5 million with maturities of more than 1 year. There were 408 issues in total that met these criteria, and their credit spreads are plotted here:

(click to enlarge)

The median credit spread on these 408 issues was 0.868%, and the average was 1.131%. How about the ratio of credit spread to default probability for all 408 issues? That is shown in the following histogram. The median ratio was 7.204 and the average ratio was 10.813.

(click to enlarge)

How did Petroleo Brasileiro SA compare to these 408 peer group issues traded on April 29, 2014? The answer is that 231 of the 408 issues traded at better credit spread to default probability ratios than any bond of any legal entity affiliated with Petroleo Brasileiro SA For the readers convenience, we include bonds issued by Petrobras Global Finance BV in the chart. The Petrobras-affiliated legal entities ranked from 232 to 300 of the 408 bond issues, that is, solidly in the third quartile of all the bonds that traded at least $5 million on April 29, 2014.

(click to enlarge)

Credit Default Swap Analysis

The Depository Trust amp; Clearing Corporation reports weekly on new credit default swap trading volume by reference name. For the week ended April 25, 2014 (the most recent week for which data is available), the credit default swap trading volume on Petroleo Brasileiro SA was 3 trades for only $700,000. That figure is not a typo. The notional principal and the number of credit default swap contracts traded on Petroleo Brasileiro SA since the Depository Trust amp; Clearing Corporation began releasing weekly statistics will be shown in a companion post on Seeking Alpha.

Additional Analysis

On a cumulative basis, the default probabilities for Petroleo Brasileiro SA range from 0.44% at 1 year (up 0.12% from October 29, 2013) to 5.41% at 10 years (up 1.59% since October 29, 2013). This is a substantial increase in cumulative default risk.

(click to enlarge)

Over the last decade, the 1-year and 5-year annualized default probabilities for Petroleo Brasileiro SA have been much more stable than the same probabilities for major financial institutions during the financial crisis. The 1-year default probability peaked at slightly under 1.80% in early 2009. The 5-year default probability peaked at slightly under 0.60% on an annualized basis at the same time. That being said, default probabilities are in a steadily rising trend that cannot be ignored. The current 5-year default probabilities are near their 2009 peak.

(click to enlarge)

As explained at the end of this note, the firms default probabilities are estimated based on a rich combination of financial ratios, equity market inputs, and macro-economic factors. Over a long period of time, macro-economic factors drive the financial ratios and equity market inputs as well. If we link macro factors to the fitted default probabilities over time, we can derive the net impact of macro factors on the firm, including both their direct impact through the default probability formula and their indirect impact via changes in financial ratios and equity market inputs. The net impact of macro-economic factors driving the historical movements in the default probabilities of Petroleo Brasileiro SA has been derived using historical data beginning in January 1990. A key assumption of such analysis, like any econometric time series study, is that the business risks of the firm being studied are relatively unchanged during this period. With that caveat, the historical analysis shows that Petroleo Brasileiro SA default risk responds to changes in 8 risk factors among the 28 worldwide macro factors used by the Federal Reserve in its 2014 Comprehensive Capital Assessment and Review stress testing program. These macro factors explain 59.6% of the variation in the default probability of Petroleo Brasileiro SA The remaining 40.4% of total variation is the estimated idiosyncratic credit risk of the firm.

Petroleo Brasileiro SA can be compared with its peers in the same industry sector, as defined by Morgan Stanley (MS) and reported by Compustat. For the worldwide energy sector, Petroleo Brasileiro SA has the following percentile ranking for its default probabilities among its 1,772 peers at these maturities:

1 month 90th percentile, up 4 points since October

1 year 79th percentile, up 6 points

3 years 72nd percentile, up 7 points

5 years 59th percentile, up 8 points

10 years 51st percentile, up 9 points

The percentile ranking of Petroleo Brasiliero SA has deteriorated significantly since October 2013. Over a longer time horizon, Petroleo Brasileiro SA ranks in the riskier half of its peer group from a credit risk.

Taking still another view, the actual and statistically predicted Petroleo Brasileiro SA credit ratings both show a rating in the very low end of the investment grade territory. The statistically predicted rating is 2 notches higher than the legacy rating from firms like the Standard amp; Poors affiliate of McGraw-Hill (MHFI) and Moodys Investors Service (MCO). The legacy ratings of the company have changed 4 times since January 2007. Both the legacy rating and the statistically predicted legacy rating reflect the fact that rating agency ratings are biased high for large companies. Put simply, Petroleo Brasileiro SA is over-rated because it is big. The bond market recognizes this.


Before reaching conclusions about whether Petroleo Brasileiro SA is investment grade, we review the markets assessment.

Using a different classification of the peer group, we can compare the credit spreads of Petroleo Brasileiro SA with the credit spreads of all firms in the Latin American corporate sector whose bonds traded on April 29. The results are shown in this graph.

(click to enlarge)

We find Petroleo Brasileiro SA credit spreads at the very high end of the Latin American peer group. We can make the same comparison with the matched maturity default probabilities for every bond of the peer group that traded on April 29. The results are shown here.

(click to enlarge)

The companys default probabilities are on the high end of the Latin American firms whose bonds traded April 29, 2014.

The next graph compares the firms credit spreads with the traded credit spreads on April 29 of all firms with a legacy rating in the investment grade range.

(click to enlarge)

It is clear from the graph that Petroleo Brasileiro SA credit spreads are on the very high end of the investment grade group. In the next graph, we compare Petroleo Brasileiro SA default probabilities with the matched maturity default probabilities for all investment grade-rated firms whose bonds traded on April 29.

(click to enlarge)

Again, we find that the default probabilities for Petroleo Brasileiro SA are on the very high end of the investment grade range.

We believe that sophisticated analysts would narrowly rank Petroleo Brasileiro SA as a non-investment grade company. The legacy rating agencies are notorious for their positive bias with respect to large firms and for their lagged response to changing circumstances. The 10-year default probability outlook of Petroleo Brasileiro SA ranks in the worst half of its peer group, and the percentile ranking has dropped substantially in the last 6 months. The bonds of Petrobras Brasileiro SA trade at a below average credit spread to default probability ratio.

This weak premium is in part determined by the fact that the legacy credit rating agencies still rank the firm as investment grade. While the link between ratings and credit spreads is very weak (ratings explain only 28% of credit spread movements), a downgrade of the firms bonds would have a significant negative impact on bond prices. We believe that the market-based peer group comparisons correctly show that Petroleo Brasileiro S. A. is risky compared to its peers and that only investors with a large risk appetite are likely to feel comfortable with this name in their portfolio.

Authors Note

Regular readers of these notes are aware that we generally do not list the major news headlines relevant to the firm in question. We believe that other authors on Seeking Alpha, Yahoo, at The New York Times, The Financial Times, and The Wall Street Journal do a fine job of this. Our omission of those headlines is intentional. Similarly, to argue that a specific news event is more important than all other news events in the outlook for the firm is something we again believe is inappropriate for this author. Our focus is on current bond prices, credit spreads, and default probabilities, key statistics that we feel are critical for both fixed income and equity investors.

Why More Credit Scores Are Better Than Fewer Credit Scores

by Shelton on May 2nd, 2014

filed under Credit Scores

by John Ulzheimer, Credit Expert for

In late 2012 the Consumer Financial Protection Bureau (CFPB) published a study analyzing the differences between credit scores sold to lenders versus those sold to consumers. The study suggested that the different scores provided similar information about the relative creditworthiness of consumers, but that for a small percentage of consumers, different scoring models gave meaningfully different results.

The CFPB is also now encouraging lenders to provide free credit scores to their customers. Inevitably this brings up a sensitive issue among consumers and their advocates and a question the 2012 CFPB study left unanswered: are consumers better off with so many credit scores?

Consumer frustration about this issue is understandable, but a large selection of credit score options is healthy because it benefits consumers through competition in the market. As such, the downside of score confusion is certainly outweighed by the benefits.

If you looked exclusively at credit bureau based risk-scoring systems, youd find over five dozen options that lenders can choose from. Those models are referred to as generic scoring systems, which means theyre sitting on a shelf and any lender in the United States can buy and use them for risk assessment for any variety of credit obligation. The next time you walk down the soft drink aisle at your local supermarket, count the number of options available and youd have a pretty good idea of how many credit scoring model options are commercially available for lenders.

And while there are dozens of scoring systems available for use by lenders, those models were developed by only a small handful of companies, including VantageScore Solutions, FICO, and the credit bureaus themselves. Each of the credit scoring models available to lenders essentially compete against each other as theyre all designed to do pretty much the same things. Whats also a given is that every one of those models will perform differently in their efforts to predict the likelihood that a consumer will become delinquent on their credit obligations.

When a lender chooses a scoring model to use, theyll normally test several options against each other to determine which does the best job of identifying future bads from those consumers who make their payments on time. This is generally done using a process called validation. If one model identifies more future bad payers than another, that model has won the head to head match up and is generally implemented by the lender for their use in underwriting. This is the considerable value of having many different scoring models to choose from.

If only one model was available, then lenders wouldnt have the ability to test multiple options for the best performing tool. That would leave all lenders at a disadvantage because their loss rates would be much higher than necessary. But, that disadvantage wouldnt reside firmly on the shoulders of lenders. Consumers would likely be the ones who would be asked to subsidize the lenders risk.

Whenever a lender identifies that there is financial risk of doing business with certain groups of consumers they have a choice to make. They can either avoid doing business with them or, they can ask consumers to subsidize their risk by paying higher interest rates and fees. Theres no doubt we would all be paying higher interest rates if there were limited, or only one, credit scoring model option.

So whether its free from a lender, through any number of websites or through the purchase of a credit monitoring service, any time we can expose consumers to credit scores and the context around how that score was calculated, consumers benefit. They benefit because credit score management is not taught at any level of academia and until the early 2000s, only consumers who also happened to work in the financial services environment knew anything about credit scores.

Today we live in an environment where most people are familiar with the concept of credit scoring. Interest rates are relatively low and credit can be extended within a very short period of time. Innovations in credit scoring and the competitive pressure to produce the most accurate and innovative credit risk management system are in a large part responsible.

Regardless of how many scores are sold to consumers or given away free, or how many models are available for use by lenders, all of them are based on the same three credit reports. That makes credit score management as easy as ensuring that the information on your three credit reports is accurate and speaks glowingly of your credit management practices.

John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice Fair Credit Reporting Act certified by the credit industrys trade association and has been an expert witness in over 140 credit related cases to date. Since 2004, John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit. Formerly of Equifax and FICO, John is the only recognized credit expert who actually comes from the credit industry.

Cash 5 lottery ticket worth $1.4 million sold in Breinigsville

by Shelton on May 2nd, 2014

filed under Business Loans

One Cash 5 lottery jackpot ticket worth $1.4 million from Wednesdays drawing was purchased in Lehigh County at a convenience store in the Breinigsville section of Upper Macungie Township.

The ticket sold at the Top Star Express in the 7700 block of Hamilton Boulevard correctly matched all five balls, 02-03-27-35-36, to win a jackpot of $1,471,383.50, less 25 percent federal withholding.

Top Star Express earns a $10,000 selling bonus.

The odds of winning the jackpot prize are 1-in-962,598; the overall odds of winning any prize are about 1-in-10.5.