Cost of financial distress and SLAC: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
m (Changed bullets)
 
imported>Doug Williamson
(Mend link.)
 
Line 1: Line 1:
''Corporate finance''.
Secondary Loss Absorbing Capital.


According to Modigliani and Miller's theory, as a company’s capital structure is composed of more and more debt a point is reached where equity cost and debt cost increase beyond that predicted by pure arbitrage of the appropriate cost of capital for the business.
In the field of bank recovery and resolution SLAC is used, especially in the UK, to refer to  other liabilities that could be written down in a distressed institution but would not be first in the firing line - that being primary loss absorbing capital ([[PLAC]]) comprising equity and bail-in-able long-term debt. The [[Financial Stability Board]] uses the term gone-concern loss absorbing capital (GLAC or [[GCLAC]]) more broadly.
This extra cost is described as the cost of financial distress; potentially the cost of dealing with a near-insolvency situation.


Financial distress costs can include:
* Higher rates of interest payable on borrowings.
* Additional fees payable on new borrowings.
* Additional restrictive covenants for new borrowings.
* Reduced availability of borrowings.
* Reduced availability of trade credit.
* Management time and loss of operational focus through the additional communications needed with lenders.
* In the worst case, actual insolvency.


The point at which financial distress costs become significant can be difficult to predict with precision.
SLAC is sometimes expressed as Secondary Loss Absorbing ''Capacity'', reflecting the fact that some loss-absorbing capacity is provided by items which are not necessarily capital instruments, for exam via bailin.
However it can be estimated by reference to industry norms for key financial credit assessment ratios such as interest cover and debt equity ratios.


At the point at which the borrower breaches the industry norm for key ratios, it is likely that significant financial distress costs will be incurred.


Also known as Bankruptcy costs.
== See also ==
*[[Bailin]]
*[[Capital]]
*[[Capital adequacy]]
*[[Contingent capital]]
*[[Loss absorbing capacity]]
*[[GCLAC]] also referred to GLAC
*[[Primary Loss Absorbing Capital]]  (PLAC)
* [[Recovery]]
* [[Resolution]]


== See also ==
[[Category:Compliance_and_audit]]
* [[Debt equity ratio]]
[[Category:Risk_frameworks]]
* [[Insolvency]]
* [[Interest cover]]
* [[Modigliani and Miller]]

Revision as of 12:29, 25 June 2022

Secondary Loss Absorbing Capital.

In the field of bank recovery and resolution SLAC is used, especially in the UK, to refer to other liabilities that could be written down in a distressed institution but would not be first in the firing line - that being primary loss absorbing capital (PLAC) comprising equity and bail-in-able long-term debt. The Financial Stability Board uses the term gone-concern loss absorbing capital (GLAC or GCLAC) more broadly.


SLAC is sometimes expressed as Secondary Loss Absorbing Capacity, reflecting the fact that some loss-absorbing capacity is provided by items which are not necessarily capital instruments, for exam via bailin.


See also

Retrieved from ‘https://wiki.treasurers.org/w/index.php?title=Cost_of_financial_distress&oldid=42538’