High-yield bonds are corporate bonds with speculative grade credit ratings, such as Ba or lower on Moody’s Investors Service’s scale, and BB or lower on the scale employed by Standard & Poor’s and Fitch Ratings. Because the press routinely derides these securities as “junk bonds,” one might infer that they are invariably obligations of dubious companies.
In reality, high-yield bond issuers include such prominent, long-established corporations as American Airlines, Ford Motor, Goodyear Tire & Rubber, Nordstrom, Rolls-Royce, Uber Technologies and Xerox.
The Argument For High-Yield Investing
What does it mean, in investment terms, for a bond to have a low credit rating? As detailed in the following table, ratings deal in large part with default risk. A default occurs when a bond issuer fails to make a contractually promised interest or principal payment on schedule. Historical records show that the lower the rating, the higher is the probability that the bond will default over a stated period—five years, in the analysis at hand.
Why would you rationally choose to buy bonds with a comparatively high likelihood of inflicting principal losses, rather than stick to the safety of investment-grade bonds? The next table addresses that question. By accepting a greater risk of default, you obtain a higher yield on your investment.
On the date shown, high-yield (speculative grade) bonds as a class yielded 3.38 percentage points more than investment grade bonds. That difference is known as the spread. It is usually expressed in terms of basis points, where one basis point equals 1/100th of a percentage point, meaning that in this instance the spread between investment grade and speculative grade bonds is 338 basis points.
Note that spreads vary widely over time. One major reason why is that the default rate is higher in recessions than during economic expansions.The basic premise of high-yield investing is that by holding a diversified portfolio of high-yield bonds, you can earn a higher net return than on high-quality bonds, provided the yield spread exceeds the expected default loss.
Note that in most cases, bondholders do not lose 100% of their principal when a bond defaults, but instead emerge with some portion of their original investment, a percentage known as the recovery rate. Therefore:
Default Loss = Default Rate x (1 – Recovery Rate)
This simple formula would sum it all up if investors did not care about fluctuations over time in the value of their portfolios, which in reality they do. A high-yield bond’s price may fall precipitously during a period in which its risk of default increases, even though no default actually occurs……
Elon Musk’s legal team has continued to seek ways to allow the tech entrepreneur to back out of his $44 billion deal to buy social media platform Twitter. On Tuesday, Musk’s lawyers filed an additional notice, disclosed to the SEC, which cited allegations made last month by the company’s former security chief Peiter “Mudge” Zatko as additional reasons to terminate the deal.
Twitter must now deal with the threat from Musk, as well as the accusations contained in Zatko’s complaint. Though the accusations made by the two men are not exactly the same, neither are their motives. The social media platform, however, is still facing two separate challenges – and will be forced to respond to each.
The notice filed on Tuesday followed a July 8 that alleged the social media company had failed to comply with its contractual obligations. Musk is now citing claims made by Zatko – who has become known as the “Twitter Whistleblower” – as a justification for backing out of the deal.
“Allegations regarding certain facts, known to Twitter prior to and as of July 8, 2022, but undisclosed to the Musk Parties prior to and at that time, have since come to light that provide additional and distinct bases to terminate the Merger Agreement,” Mike Ringler, Musk’s legal representative, wrote in a letter to Twitter’s legal chief, Vijaya Gadde, CNBC reported.
Twitter’s legal team quickly responded, stating that Musk’s termination case was “invalid and wrongful under” the acquisition agreement.
“It is based solely on statements made by a third party that, as Twitter has previously stated, are riddled with inconsistencies and inaccuracies and lack important context,” the letter written by lawyer William Savitt said. “Contrary to the assertions in your letter, Twitter has breached none of its representations or obligations under the Agreement, and Twitter has not suffered and is not likely to suffer a Company Material Adverse Effect.”
Dual Challenges For Twitter
“It’s hard to say whether either Musk or the whistleblower pose any substantial threat to Twitter at this point,” suggested technology industry analyst Charles King of Pund-IT. That could certainly change in the coming months.
“Heading into Delaware Chancery Court in October the Twitter vs. Elon Musk case is around the corner with both legal teams getting ready for this unprecedented battle around the $44 billion Twitter deal,” explained Dan Ives, managing director of Equity Research at Wedbush Securities, via an email.
“A potentially major development… has been whistleblower case from former security chief and Twitter executive Peiter ‘Mudge’ Zatko which could give Musk a much-needed small victory,” Ives continued.
Musk’s legal team has now subpoenaed Zatko to appear for a deposition in its legal fight against Twitter on September 9th. Zatko alleged in his 200-page whistleblower disclosure that Twitter has serious privacy and security vulnerabilities that could put users at risk, and pose national security risk given the data issues.
“Importantly, Zatko claims that Twitter does not have an accurate count of the number of spam and fake bot accounts on its platform, which will be front and center for the Musk team when they speak to Zatko as this could significantly beef up its claims vs. Twitter,” said Ives.
“There are also a number of other legal back and forths going on in this Twitter case,” Ives noted. “But ultimately the Zatko development and timing is a huge potential win for Musk, which could complicate the Twitter case.”
What Does It Mean For Twitter
Twitter’s board of directors now seems intent on holding Musk to his original agreement – but whether the deal is forced through or not, changes are likely coming to the platform.
“Despite his various protestations, their case looks pretty strong,” King told this reporter. “If Musk is forced to purchase the company, it is probably that he’ll make substantial changes to Twitter’s leadership and management corps but that assumes that the people he’d likely target would still be around. Overall, I believe that many Twitter employees would bail out rather than work for Musk.”
Even if Musk is able to get out of the deal to purchase the platform, Twitter could face future challenges.
“The whistleblower is a different situation,” King continued. “Depending on how his (Zatko’s) testimony to Congress proceeds, Twitter could be required to make substantial changes to the way it manages security and access to users’ accounts.”
That could be seen as a good thing for both the company and its users. “However, that assumes that there is substance to the whistleblower’s complaints,” King also noted, adding, “It isn’t entirely clear at this point.”
Twitter has major security problems that pose a threat to its own users’ personal information, to company shareholders, to national security, and to democracy, according to an explosive whistleblower disclosure obtained exclusively by CNN and The Washington Post. The disclosure, sent last month to Congress and federal agencies, paints a picture of a chaotic and reckless environment at a mismanaged company that allows too many of its staff access to the platform’s central controls and most sensitive information without adequate oversight.
It also alleges that some of the company’s senior-most executives have been trying to cover up Twitter’s serious vulnerabilities, and that one or more current employees may be working for a foreign intelligence service. The whistleblower, who has agreed to be publicly identified, is Peiter “Mudge” Zatko, who was previously the company’s head of security, reporting directly to the CEO. Zatko further alleges that Twitter’s leadership has misled its own board and government regulators about its security vulnerabilities, including some that could allegedly open the door to foreign spying or manipulation, hacking and disinformation campaigns.
The whistleblower also alleges Twitter does not reliably delete users’ data after they cancel their accounts, in some cases because the company has lost track of the information, and that it has misled regulators about whether it deletes the data as it is required to do. The whistleblower also says Twitter executives don’t have the resources to fully understand the true number of bots on the platform, and were not motivated to. Bots have recently become central to Elon Musk’s attempts to back out of a $44 billion deal to buy the company (although Twitter denies Musk’s claims).
Zatko was fired by Twitter (TWTR) in January for what the company claims was poor performance. According to Zatko, his public whistleblowing comes after he attempted to flag the security lapses to Twitter (TWTR)’s board and to help Twitter (TWTR) fix years of technical shortcomings and alleged non-compliance with an earlier privacy agreement with the Federal Trade Commission. Zatko is being represented by Whistleblower Aid, the same group that represented Facebook whistleblower Frances Haugen.
John Tye, founder of Whistleblower Aid and Zatko’s lawyer, told CNN that Zatko has not been in contact with Musk, and said Zatko began the whistleblower process before there was any indication of Musk’s involvement with Twitter. After this article was initially published, Alex Spiro, an attorney for Musk, told CNN, “We have already issued a subpoena for Mr. Zatko, and we found his exit and that of other key employees curious in light of what we have been finding.”
CNN sought comment from Twitter on more than 50 specific questions regarding the disclosure. In a statement, a Twitter spokesperson told CNN that security and privacy are both longtime priorities for the company. Twitter also said the company provides clear tools for users to control privacy, ad targeting and data sharing, and added that it has created internal workflows to ensure users know that when they cancel their accounts, Twitter will deactivate the accounts and start a deletion process. Twitter declined to say whether it typically completes the process.
“Mr. Zatko was fired from his senior executive role at Twitter in January 2022 for ineffective leadership and poor performance,” the Twitter spokesperson said. “What we’ve seen so far is a false narrative about Twitter and our privacy and data security practices that is riddled with inconsistencies and inaccuracies and lacks important context. Mr. Zatko’s allegations and opportunistic timing appear designed to capture attention and inflict harm on Twitter, its customers and its shareholders. Security and privacy have long been company-wide priorities at Twitter and will continue to be.”
Some of Zatko’s most damning claims spring from his apparently tense relationship with Parag Agrawal, the company’s former chief technology officer who was made CEO after Jack Dorsey stepped down last November. According to the disclosure, Agrawal and his lieutenants repeatedly discouraged Zatko from providing a full accounting of Twitter’s security problems to the company’s board of directors.
The company’s executive team allegedly instructed Zatko to provide an oral report of his initial findings on the company’s security condition to the board rather than a detailed written account, ordered Zatko to knowingly present cherry-picked and misrepresented data to create the false perception of progress on urgent cybersecurity issues, and went behind Zatko’s back to have a third-party consulting firm’s report scrubbed to hide the true extent of the company’s problems.
The disclosure is generally much kinder to Dorsey, who hired Zatko and whom Zatko believes wanted to see the problems within the company fixed. But it does depict him as extremely disengaged in his final months leading Twitter – so much so that some senior staff even considered the possibility he was sick.
CNN has reached out to Dorsey for comment. A person familiar with Zatko’s tenure at Twitter told CNN the company investigated several claims he brought forward around the time he was fired, and ultimately found them unpersuasive; the person added that Zatko at times lacked understanding of Twitter’s FTC obligations. Zatko believes his firing was in retaliation for his sounding the alarm about the company’s security problems.
The scathing disclosure, which totals around 200 pages, including supporting exhibits – was sent last month to a number of US government agencies and congressional committees, including the Securities and Exchange Commission, the Federal Trade Commission and the Department of Justice. The existence and details of the disclosure have not previously been reported. CNN obtained a copy of the disclosure from a senior Democratic aide on Capitol Hill.
The SEC, DOJ and FTC declined to comment; the Senate Intelligence Committee, which received a copy of the report, is taking the disclosure seriously and is setting a meeting to discuss the allegations, according to Rachel Cohen, a committee spokesperson. Sen. Dick Durbin, who chairs the Senate Judiciary Committee and also received the report, vowed to investigate “and take further steps as needed to get to the bottom of these alarming allegations.”
The cryptocurrency market’s latest swoon is giving investors a painful lesson about the risks of trading digital tokens through intermediaries. In a bankruptcy restructuring, crypto investors would be navigating uncharted territory.“What can safely be predicted is that there will be litigation, and there will be delay,” said Adam Levitin, a law professor at Georgetown University who studies bankruptcy.
Crypto exchanges and lending services provide individual investors an on-ramp to markets, but the cryptocurrency that customers put on these platforms might not belong to them in the eyes of a bankruptcy court, according to regulators and legal experts. If a cryptocurrency company goes bust, its users’ digital assets will likely go into the bankruptcy estate that lawyers, financial advisers, lenders and other creditors divvy up. Customer assets could be repaid at a loss, rather than simply returned to the users.
Even if customers of a troubled cryptocurrency firm eventually get access to their tokens, they still could suffer big losses if the market turned against them while the bankruptcy played out. Many people were motivated to put crypto assets in Celsius to earn interest rates as high as 18%. The lender took customer deposits and put them in decentralized finance investments to get a return or lent the funds out to other users for a fee.
Celsius looks like a bank in many ways. But the company lacks the protections that banks have, such as federally backed deposit insurance. Celsius, and other cryptocurrency intermediaries, also aren’t registered as broker-dealers, which provide account holders with critical protections in the event of bankruptcy by keeping their funds separate from the broker-dealers’ own funds. In the U.S., most crypto intermediaries instead possess simple money-transmitter licenses issued by state governments, intended for companies like Western Union.
How Celsius’s crypto lending process works:
Celsius puts customer deposits in decentralized finance investments and lends out funds to other users (including to exchanges and market makers). Customers lend money to Celsius in exchange for yield. (This is essentially an unsecured loan). Celsius earns a return from borrowers and investments. Celsius puts customer deposits in decentralized finance investments and lends out funds to other users (including to exchanges and market makers).
Customers lend money to Celsius in exchange for yield. (This is essentially an unsecured loan). Celsius earns a return from borrowers and investments. In a recent paper, Mr. Levitin argued that the easiest way to protect investors would be for the Consumer Financial Protection Bureau, a federal regulator, to require that cryptocurrency exchanges hold customer funds in bankruptcy-remote arrangements to segregate funds. He said the CFPB has clear authority from Congress to take such steps but that the agency has yet to do so.
Coinbase shares plunged following a disclosure by the company in May that customers could be treated as general unsecured creditors in a hypothetical bankruptcy. Celsius also sought to reassure customers shortly before it froze withdrawals. A spokeswoman for the firm told The Wall Street Journal in an email Friday that it had not had any issues meeting withdrawal requests and that it held enough ether—a popular cryptocurrency—to meet its obligations.
Alex Mashinsky lashed out at skeptics on Twitter who suggested Saturday that the company was on the ropes, accusing them of spreading misinformation. The company froze accounts Sunday evening. On Wednesday afternoon, the assets were still frozen, and Mr. Mashinsky tweeted that the firm was “working nonstop” on the issue. In a bankruptcy setting, much will depend on the contract depositors agreed to when they put their digital assets in. Terms of use for Celsius specify that the legal status of users’ crypto holdings will be unclear if the firm were to become insolvent.
Some lawyers say the type of contract between investor and firm could make a difference and offer some protection of ownership rights in bankruptcy. The treatment of customer assets may depend on whether the firm holds them in a way that is consistent with customer ownership as established under relevant commercial laws, said Jonathan Cho, a bankruptcy and regulatory lawyer at Allen & Overy. For example, many firms have adopted a holding model, available under the commercial laws of most states, that helps define what the ownership rights should be, Mr. Cho said. Celsius also has a lending arm that offers cash loans, collateralized by people’s cryptocurrency assets.
A bankruptcy judge may also have to decide whether Celsius’s depositors would even be considered unsecured creditors or merely investors, which rank even lower, said Jim Van Horn, bankruptcy lawyer at Barnes & Thornburg LLP. State laws on ownership of assets in custodial accounts might be helpful to depositors. But they may not even come into play in a bankruptcy case if a judge determines that users are merely investors, Mr. Van Horn said.
The crypto market suffered one of its most dramatic selloffs in years this week as the prices of top cryptocurrencies declined as much as 35% week-over-week as fears of a broad economic recession intensified. On Saturday, the total global market cap of cryptocurrencies sank below $850 billion as top tokens tumbled. Ethereum is trading at half of where it was one month ago, falling below the $1,000 price barrier which it has traded above since January of 2021. That figure is down roughly 80% since it’s all-time-high in November of last year.
Bitcoin, the largest cryptocurrency by market cap, similarly eclipsed an important price barrier Saturday, falling below $20,000 after a weeks-long plunge ratcheted the currency down again and again. While investors in top coins worry, smaller ecosystems are dealing with major hits as well as backers grow concerned about the survival of tokens and ecosystems that are still nascent at the edge of a bear market. There are still some 44 tokens with market caps north of $1 billion according to CoinMarketCap.
The latest crypto crash occurs as investors grow fearful of macroeconomic conditions and the Federal Reserve’s efforts to curb inflation. Crypto investors have also seen a number of core protocols and services threatened by the rapid depreciation of assets with some worrying that the inter-reliance of these various services could cause cascading shutdowns.
Many employers find performance management, or instigating disciplinary action against employees for misconduct, difficult and emotionally challenging. It can be hard for an employer to distinguish between misconduct and underperformance; it’s harder still managing an employee through either a disciplinary or a performance management process with confidence.
If you are required to take management action, to help you gain confidence in your processes which in turn may help you to build a better business, we have set out some differences between performance management and disciplinary action below.
What is Disciplinary Action?
If an employee is behaving improperly in the workplace, an employer may need to raise and address concerns regarding the employee’s conduct by means of a formal disciplinary process.
Employers should introduce and implement policies and procedures in line with the expected standards of behaviour in the workplace, so employees know what is considered acceptable conduct. These policies should be made available to all employees and the employer should be consistent in applying and enforcing these policies.
Disciplinary action is usually taken to address misconduct, which is defined as behaviour in the workplace which is generally unacceptable, or contrary to the employment contract, or breaches policies and procedures of a company.
What Are Some Examples of Misconduct?
Misconduct is behaviour that is considered unacceptable and inconsistent with employee obligations or duties, i.e., a breach of company policy or procedure.
Examples include:
unauthorised absences (including ‘sickies’)
lateness
bad language
poor presentation
misuse of company equipment
Serious Misconduct
Serious misconduct is defined as wilful and deliberate behaviour that is inconsistent with the continuation of the employment contract or causes serious and imminent risk to the reputation, viability or profitability of the business, or health and safety of a person. Examples includes theft, fraud, and assault.
Provided a fair process is followed, serious misconduct may give an employer grounds for instant, or summary, dismissal which means the employee is not provided with notice, or payment of notice in lieu.
Employsure is here for business owners and are committed to giving every business free initial advice. If this is a topic of concern and you need to get more from your staff, call us on 1300 207 182.
Appropriate Standards of Behaviour
It needs to be noted that not all misconduct is clear and obvious. For example, getting into a fight at work is clearly and obviously inappropriate behaviour in any workplace, however, expected behaviour when using company equipment may vary from business to business. It’s important to ensure that you’ve implemented – and consistently applied – a thorough code of conduct or standards of behaviour policy in your workplace in case an employee disputes an allegation of misconduct.
What is Performance Management?
Performance management is used to address poor performance. Poor performance is where an employee is not meeting the essential requirements of their role. If an employee is underperforming – for example failing to hit KPIs or unable to meet their remit due to lack of skills an employer may consider entering the employee into a performance management process.
As part of a fair process, the employer should identify the issue e.g., where skills are lacking, inform the employee and provide further training where appropriate. The employer should put in place a plan of action to address the performance issues and to give the employee an opportunity to improve to the required standard. Performance management should only address the requirements of the role, not behaviour in the workplace; it should be clear that misconduct is not poor performance.
While part of the performance management process is similar to disciplinary procedures, it is important for employers to not conflate the two concepts. If you’d like to know more about performance management, download Employsure’s free guide. For a more confidential chat, call Employsure’s Employer Helpline for free initial advice: 1300 207 182.
What’s the Difference?
A performance management process may result in further training or a performance management plan (PMP), or performance improvement plan (PIP), an opportunity to improve their performance.
A disciplinary procedure may not result in a behavioral management plan as it is not an employer’s responsibility to ensure their employees act reasonably and appropriately in the workplace. An employer’s duty is only to remind them of their expected behaviour in the workplace and ensure they abide by it.
Stablecoins increasingly are the form of cryptoassets most commonly used for transactional purposes, and as 2022 gets underway the importance of these cryptoassets will only increase.
From a business and marketplace point of view the upsides and opportunities linked to stablecoins are clear, and have been reinforced over the last several years. As should be self-evident by the moniker, the primary benefit of stablecoins is the reduced price volatility that often characterizes other cryptoassets.
A simple statement of fact, but one whose importance cannot be overstated. In order to achieve mainstream adoption and utilization as a medium of exchange rather than simply a speculative investment, users and consumers must have confidence in the value of whatever is being utilized for this purpose.
The appetite and interest in stablecoins has been demonstrated by the billions in transactions taking place using these assets, the regulatory focus highlighted by the President’s Working Group report on the matter, and the fact that several major payment processers now allow customers to send and receive payments denominated in stablecoins.
In other words, the functionality of these tools and market interest has been proven and established; the technology works and fills a need. Policy, or lack thereof, still remains a looming threat to broader adoption and utilization, and is an area that will need to be addressed as the sector continues to mature.
Obviously the conversations linked to cryptoasset regulation is beyond the scope of any singular article. Rather, the factors listed below are explicitly connected to stablecoins, and how commonsense policies can not only help accelerate adoption of stablecoins, and also create a regulatory environment that allows for further maturation and development of the space.
Let’s take a look at a few policy items that could – and hopefully will – accelerate the already rapid adoption of stablecoins.
Differentiate stablecoins. This point cannot be overstated; in order to further develop and expand the opportunities for stablecoin utilization, there needs to be a differentiation between stablecoins and other cryptoassets. While it is true that the cryptoasset space at large has become much busier during the last year or so – non-fungible tokens (NFTs), decentralized finance (DeFi), and the rise of central bank digital currencies (CBDCs) – the importance of this singular difference is paramount.
Even now as regulators seek to implement policies to monetize and capture the benefits connected to cryptoassets, stablecoins are routinely lumped in with more volatility counterparts. This not only misses the bigger point regarding the value case of stablecoins, but muddies the water around how to best integrate cryptoassets into financial markets.
Monetary competition is good. Recent comments and conversations have focused on, notably around the different CityCoin projects that have launched during the last several months, is that developing this array of options might not be the best use of resources. The thinking goes, why not instead invest these resources in developing other technologies or addressing other economic or societal issues versus introducing yet another cryptoasset? This line of thinking, as appealing as it might appear upon first review, misses the broader point.
Every economic sector, be it connected to technology or not, is improved by the introduction of competitive options for consumers, investors, and users alike. Many of the same proponents of more standardized and centralized cryptoasset options, namely CBDCs, should be encouraging new and innovative stablecoin options. Lessons learned in the private sector can – and have – been integrated into the development of newer and more mainstream cryptoasset options.
Competition is a good thing, and the best components of different tools will be integrated into whatever options do eventually achieve mainstream status.
Simpler reporting requirements. The tax, compliance, and reporting obligations that accompany cryptoassets are a burden that have been discussed in multiple outlets, and the issues that exist are nothing new. Building on the first point mentioned above, this is also an opportunity for policymakers to demonstrate that more sophisticated public commentary is also working its way into more nuanced regulation and rule-making. One of the best ways to communicate that policy is evolving alongside the sector would be to ease the compliance burden on the issuers and users of stablecoins.
Clearly there is always a role for well-informed and thought out regulation and rules, but the current reporting obligations seem more appropriate for cryptoassets with higher volatility than stablecoins. This subset of cryptoassets were developed, and have been explicitly designed, to function as a medium of exchange; how can this happen if potential tax obligations need to be recorded and reported for every transaction?
Understandably, government authorities wish to collect taxes when appropriate; that is not the problem in this context. The issue is when the rules that have been implemented seem to specifically and artificially undermine the primary use case of the instrument (stablecoins) in question.
Stablecoins have quickly rocketed from an interesting cryptoasset that might have struck some market participants as a boring alternative to bitcoin to an integral link in the adoption journey for many individuals and organizations. Despite this rapid growth and acceptance, however, work remains in order to fully realize the potential of these cryptoassets for transactional purposes.
As the calendar rolls forward into 2022, this is the perfect time to revisit, revise, and improve rules and policies around stablecoins. Serving a bridge and on-ramp for market actors at varying levels of expertise, stablecoins have a critical role to play; effective policy can go a long way to making this a reality.
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Why would you rationally choose to buy bonds with a comparatively high likelihood of inflicting principal losses, rather than stick to the safety of investment-grade bonds? The next table addresses that question. By accepting a greater risk of default, you obtain a higher yield on your investment.
This simple formula would sum it all up if investors did not care about fluctuations over time in the value of their portfolios, which in reality they do. A high-yield bond’s price may fall precipitously during a period in which its risk of default increases, even though no default actually occurs……
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