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High-grade credit

Extensive revisions to capital requirements under Basle II will force structural changes in the financial services industry, offering advantages to some institutions and hindering others.

Good old-fashioned dividends are coming back into vogue. Nearly three years after previously soaring stocks came crashing down, investors are starting to show more interest in getting a steady income stream from equity investments.

Since the end of October, following the Bali nightclub bombing, Indonesia has found itself in a group of countries that even Afghanistan doesn't quite belong to. Although the UK Foreign & Commonwealth Office seems to think that parts of Kabul are safe to visit, it advises against all travel to Indonesia. And that slaps the same warning sticker on Indonesia as on Burundi (civil war) Liberia (civil war) Somalia (anarchy and kidnappings) and Iraq (self-explanatory). The pleadings of Indonesian politicians that their country is not a terrorist-infested, extremist Muslim state have so far fallen on deaf ears.

Recent proposals from the Basle Committee on Banking Supervision have dismayed securitization bankers. They believe regulators are taking an unjustifiably punitive approach to the industry.

In early November credit protection on building materials group Hanson was trading at 95bp while some traders' debt equity models said the correct valuation was 160bp. Its shares held steady. That was the trigger that capital structure arbitrageurs were waiting for.

Bankers and investors putting on debt versus equity trades are drawing on the idea first expounded by Nobel economics laureate Robert Merton that equity can be thought of as a call option on the assets of a firm. If the share price dips below a certain level - implying a lower value on the firm's assets and cashflows relative to its liabilities - default will follow. Bondholders, meanwhile, have sold an equity put option to the issuer and the spread on a corporate bond is the premium for taking that position.

India

Issuer: Core Investment Grade Bond TrustAmount: $2.025 billionLaunched: November 15 2002Bookrunners: Bank of America, JPMorgan

Russia

Russia

Securities firms are still debating a global settlement over equity research with New York state attorney general Eliot Spitzer, the SEC and other US prosecutors seeking to avenge investors' losses. All the parties, though, seem to have lost sight of their true purpose. The changes proposed so far will neither restore faith in the system nor prevent future abuses. They are unworkable and thus irrelevant. Proposed reforms are targeted at the wrong level: at the institution not the individual.