How blockchain challenges traditional financial systems: Lessons from my ESSEC thesis

Alexandre GANNE

In this article, Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2025) shares key insights from his bachelor thesis on blockchain technology and its implications for traditional banking systems.

Introduction

This post is the result of a year-long academic research project conducted as part of my final thesis at ESSEC Business School. It explores how the growing adoption of blockchain technology is redefining core principles of traditional financial systems and the strategic implications this transformation holds for banking institutions.

The disruptive nature of blockchain

Blockchain is often described as the cornerstone of the next technological revolution in finance. It allows for the decentralization of data storage and value exchange, eliminating the need for central authorities to validate transactions. With distributed consensus mechanisms and cryptographic security, blockchain systems can operate autonomously and transparently. These features make it not just a new tool, but a foundational shift that could reshape core banking functions such as recordkeeping, interbank transfers, and credit issuance. Its key characteristics, immutability, programmability, disintermediation, and transparency, pose significant challenges to the centralized model of traditional finance.

From intermediation to decentralization

One of blockchain’s most radical promises is disintermediation. Traditional financial systems are heavily reliant on intermediaries such as banks, brokers, and clearinghouses to establish trust and validate transactions. Blockchain introduces the ability to execute trustless peer-to-peer exchanges using cryptographic proofs and decentralized ledgers. For example, platforms like Ethereum enable the deployment of smart contracts, self-executing programs that automatically enforce the terms of a contract without human intervention, drastically reducing friction and cost.

Security and auditability

Unlike traditional databases that are vulnerable to manipulation or single points of failure, blockchain offers a tamper-proof and chronologically auditable data structure. This makes it a valuable tool for regulatory compliance and fraud prevention.

Implications for the banking sector

Custody and settlement

Traditional banks act as intermediaries for the settlement of securities and custody of assets. Blockchain-based tokenization could eliminate the need for such intermediaries by allowing real-time settlement and direct ownership recording on-chain.

Compliance

Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures are critical, yet often duplicative and costly for financial institutions. Blockchain can streamline these processes by allowing users to maintain a single, verified digital identity that can be securely shared across multiple entities. Through permissioned blockchain networks, institutions can access and update identity records in real time, increasing efficiency while maintaining regulatory compliance. Additionally, immutable audit trails enhance traceability and accountability.

New business models

The rise of decentralized finance (DeFi) introduces new paradigms in financial services, automated lending, yield farming, insurance, and derivatives, all operating without traditional intermediaries. In response, incumbent banks are exploring strategic partnerships, investments in blockchain startups, and internal initiatives to tokenize assets or build proprietary custodial solutions. Hybrid models, blending regulated infrastructure with decentralized services, are likely to emerge as a dominant trend over the next decade.

Why should I be interested in this post?

For any ESSEC student or finance professional interested in the frontier of financial innovation, this article distills the key findings of a year-long academic thesis dedicated to understanding how blockchain is transforming our industry. It bridges theory and practice, highlighting both opportunities and risks. As regulators, institutions, and entrepreneurs continue to shape the future of financial systems, understanding blockchain is no longer optional, it is essential to navigate and lead in tomorrow’s economy.

Related posts on the SimTrade blog

   ▶ Nithisha CHALLA Top financial innovations in the 21st century

   ▶ Youssef EL QAMCAOUI Decentralized finance (DeFi)

   ▶ Snehasish CHINARA Cardano: Exploring the Future of Blockchain Technology

   ▶ Snehasish CHINARA Solana: Ascendancy of the High-Speed Blockchain

   ▶ Snehasish CHINARA Ethereum – Unleashing Blockchain Innovation

Useful resources

BIS – The implications of decentralised finance

ECB – Blockchain

FSB – Blockchain

About the author

The article was written in May 2025 by Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2025).

My internship as Finance Assistant Manager at Kpler

Alexandre GANNE

In this article, Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2025) shares his professional experience as Finance Assistant Manager at Kpler.

About the company

Kpler is a fast-growing technology and data intelligence company offering transparency solutions in commodity markets. Its platforms collect and analyze data from hundreds of sources: including radar, satellites, shipping databases, and government publications, to provide real-time insights into global supply and demand dynamics. Kpler’s clients include energy giants, trading houses, public utilities, and financial institutions such as hedge funds and banks.

Logo of Kpler.
Logo of Kpler
Source: the company.

Headquartered in Paris, Kpler has a strong international presence with offices in London, Singapore, Dubai, Houston, and New York. Its diverse team and innovative culture have made it one of the key disruptors in the financial and energy data sectors.

My internship

My missions

During my internship, I worked within the Finance Department as a Finance Assistant Manager, contributing to Kpler’s accounts receivable processes. As my first business school internship, which I completed at just 19 years old over a period of three months, this role gave me early exposure to the financial operations of a rapidly scaling tech firm. My responsibilities included issuing and monitoring invoices across multiple international entities (France, UK, UAE, US, Singapore), tracking and securing timely customer payments, and managing unresolved payment situations in coordination with sales and operations teams. I was also in charge of analyzing client payment performance metrics (e.g. Days Sales Outstanding), supporting forecasting tasks, and escalating at-risk accounts to senior management.

Required skills and knowledge

The internship required strong organizational and analytical skills, with an understanding of accounting principles and international tax practices. Proficiency in Microsoft Excel and familiarity with ERP or invoicing software were essential for data manipulation and reporting. Additionally, this position demanded a high level of professional communication, especially in client interactions regarding payment reminders, dispute resolution, and follow-ups, often involving senior finance stakeholders.

What I learned

This experience gave me a detailed view of how financial flows are managed in a fast-paced, multinational tech company. I enhanced my technical skills in accounts receivable management, financial forecasting, and reporting. The daily collaboration with sales and legal teams further reinforced my ability to work across departments and navigate complex operational settings in English and French. I also learned to use software tools such as NetSuite and Salesforce.com. Beyond technical knowledge, I discovered what it means to work in a 21st-century startup environment, which contrasts significantly with traditional corporate structures. I learned to manage my own working hours, adapt to flexible geographies, including remote work setups, although I preferred being on-site in the Paris office to engage directly with the talented Kpler teams. Finally, I developed the ability to communicate effectively with people from diverse professional backgrounds, including engineers, developers, and sales specialists.

Financial concepts related to my internship

I present below three financial concepts related to my internship: Days Sales Outstanding (DSO), Cash Flow Forecasting, and Credit Risk Assessment.

Days Sales Outstanding (DSO)

DSO measures the average number of days it takes for a company to collect payment after a sale. At Kpler, I regularly tracked this KPI across entities to identify underperforming accounts. A high DSO can indicate liquidity issues and may require proactive engagement strategies. My tasks involved identifying trends in DSO, generating dashboards to report them, and communicating with internal teams to initiate corrective actions with clients.

Cash Flow Forecasting

Cash flow forecasting involves projecting future cash inflows and outflows to ensure the company can meet its financial obligations. As part of the finance team, I supported the preparation of weekly and monthly forecasts based on outstanding invoices, historical payment behavior, and contractual terms. Accurate forecasting is crucial for maintaining solvency and planning investments in high-growth companies like Kpler.

Credit Risk Assessment

Credit risk assessment evaluates the likelihood that a customer will default on their payment obligations. At Kpler, I participated in risk reviews using payment histories and financial data to inform internal decisions regarding client credit terms. For high-risk clients, I contributed to drafting escalation reports and supported the implementation of preemptive actions such as revised payment terms or partial upfront invoicing.

Why should I be interested in this post?

This post is particularly relevant for students interested in finance within innovative environments. It provides exposure to international operations, cross-functional collaboration, and practical financial risk management. Working at Kpler allows you to evolve in a data-driven culture that sits at the intersection of finance, technology, and energy markets. It is also a unique opportunity to contribute meaningfully to strategic processes in a fast-scaling tech firm.

Related posts on the SimTrade blog

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Useful resources

Kpler – Official Website

About the author

The article was written in May 2025 by Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2025).

My apprenticeship as Depositary Control Auditor at CACEIS Bank

Alexandre GANNE

In this article, Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2025) shares his professional experience as Depositary Control Auditor at CACEIS Bank.

About the company

CACEIS Bank is a leading European financial institution specializing in asset servicing. A subsidiary of Crédit Agricole and Santander, CACEIS provides custody, depositary, and fund administration services to institutional clients, management companies, and large corporates. The group supervises more than €2.3 trillion in assets under custody and over €3 trillion in assets under administration.

Logo of CACEIS Bank
Logo of CACEIS Bank
Source: the company.

The Depositary Control team plays a critical role in investor protection, ensuring that asset managers operate in compliance with applicable regulations. It verifies the correct valuation of assets, control of financial ratios, and the conformity of transactions made on behalf of the funds.

My internship

My missions

As a Depositary Control Auditor, my primary responsibility was to conduct thematic audits on European investment management companies with assets exceeding €5 billion. I focused on key control areas such as asset valuation, regulatory ratios, and Value at Risk (VaR). I also carried out analytical reports on current macroeconomic trends to assess their potential impact on asset management practices. Additionally, I worked on recurring and ad hoc studies, such as evaluating the impact of the ongoing real estate crisis on real estate investment funds (REITs, OPCIs, SCPI), analyzing their asset exposure, liquidity constraints, and valuation resilience.

Required skills and knowledge

This role required a solid understanding of financial regulations and investment vehicles, as well as proficiency in the Microsoft Office suite, especially Excel for financial modeling and reporting. Soft skills such as rigor, autonomy, and teamwork were crucial to ensure the reliability of our audit reports and smooth communication with asset managers. A high level of professionalism in client communication was essential, particularly when addressing sensitive compliance issues with senior representatives of management companies.

What I learned

This apprenticeship allowed me to develop a comprehensive understanding of the regulatory ecosystem of European asset management. I acquired expertise in risk control, asset valuation methodologies, and fund auditing practices. I also improved my organizational skills, learning to manage several audit missions simultaneously while respecting strict deadlines and reporting requirements.

Financial concepts related to my internship

I present below three financial concepts related to my internship: asset valuation, Value at Risk (VaR), and key regulatory ratios.

Asset Valuation

Asset valuation is the process of determining the fair market value of assets held in an investment portfolio. This is a critical step in calculating the Net Asset Value (NAV) of a fund. In practice, I reviewed how management companies priced listed assets (using mark-to-market techniques) and unlisted assets (using models like discounted cash flows or multiples comparison). I ensured that valuation methods adhered to regulatory guidelines and were consistently applied, especially for complex or illiquid assets.

Value at Risk (VaR)

Value at Risk (VaR) quantifies the potential maximum loss of a portfolio under normal market conditions over a specific time period and confidence level (e.g., 99% over 10 days). I assessed the robustness of VaR models used by asset managers, ensuring they incorporated appropriate volatility measures, stress scenarios, and backtesting. VaR helped us monitor whether funds stayed within authorized market risk limits and provided a quantitative basis for risk-based oversight.

Regulatory Ratios

Regulatory ratios include leverage, liquidity, and concentration limits imposed by the AIFM and UCITS directives. During audits, I verified that asset managers respected these ratios daily and that breaches were properly justified and resolved. This involved reviewing internal control mechanisms and examining historical data to detect anomalies or patterns of non-compliance, thereby reinforcing the protection of investor interests.

Why should I be interested in this post?

This internship is particularly valuable for students interested in financial regulation, risk oversight, or asset management. Beyond that, it is a gateway to multiple career paths in finance. I am honored to be the fifth ESSEC student to hold this position at CACEIS Bank. Many of my predecessors went on to successful careers in investment banking, private equity, or consulting, demonstrating that this experience builds a strong foundation even beyond the field of risk management. Being part of this legacy pushes me to give my best and uphold the high standards set by those who came before me.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Clara PINTO Investment is a flighty bird which needs to be controlled

   ▶ Jayati WALIA Value at Risk

   ▶ Andrea ALOSCARI Valuation methods

   ▶ Akshit GUPTA Regulations in financial markets

Useful resources

CACEIS – Home Page

EFAMA – European Fund and Asset Management Association

Autorité des Marchés Financiers (AMF)

About the author

The article was written in May 2025 by Alexandre GANNE (ESSEC Business School, Global Bachelor in Business Administration (GBBA) –2025).

Pricing Weather Risk: How to Value Agricultural Derivatives with Climate-Based Volatility Inputs

Mathias DUMONT

In this article, Mathias DUMONT (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2022-2026) explains how weather risk impacts the pricing of agricultural derivatives like futures and options, and how climate-based data can be integrated into stochastic pricing models. Combining academic insights and practical examples, including a mini-case from the SimTrade Blé de France simulation, the article illustrates adjustments to models such as the Black-Scholes-Merton model for temperature and rainfall variables in valuing agricultural contracts.

Introduction

Extreme weather has always been a critical factor in agriculture, but climate change is amplifying the frequency and severity of these events. From prolonged droughts to unseasonal floods, weather shocks can send crop yields and commodity prices on wild rides. This rising uncertainty has given birth to weather derivatives – financial instruments designed to hedge weather-related risks – and has made volatility forecasting a key challenge in pricing agricultural contracts. In fact, as businesses grapple with climate volatility, trading volume in weather derivatives has surged. CME Group saw a 260% increase last year (CME Group, 2023). The question for traders and risk managers is: how do we quantitatively factor weather risk into the pricing of futures and options on crops like wheat and corn?

Weather Risk and Agricultural Markets

Weather directly affects crop supply. A bumper harvest following ideal weather can flood the market and depress prices, whereas a drought or frost can decimate yields and trigger price spikes. These supply swings translate into volatility for agricultural commodity markets. For example, during the U.S. drought of 2012, corn prices skyrocketed, and the implied volatility of corn futures jumped by over 14 percentage points within a month, reaching ~49% in mid-July. Such surges reflect the market rapidly repricing risk as participants absorb new climate information (in this case, worsening crop prospects). Seasonal patterns are also evident: harvest seasons tend to coincide with higher price volatility because that’s when weather uncertainty is at its peak. Studies show that harvesting cycles create predictable seasonal volatility patterns in crop markets – when a critical growth period is underway, any shift in rainfall or temperature forecasts can send prices swinging.

Beyond affecting supply quantity, weather can influence crop quality (e.g., excessive rain can spoil grain quality) and even logistic costs (flooded transport routes, etc.), further feeding into prices. The interconnected global nature of agriculture means a drought in one region can reverberate worldwide. As noted in the SimTrade Blé de France case, weather conditions in France influence the quantity and quality of wheat the company harvests, while weather conditions around the world influence the international wheat price. In the Blé de France simulation (which models a French wheat producer’s stock), participants see how news of floods or droughts translate into stock price moves. For instance, the company might project a 7-million-ton wheat harvest, but analysts’ forecasts range from 6.5 to 7.2 Mt – with the realized level highly weather-dependent in the final weeks of the season. A poor weather turn not only shrinks the crop but boosts global wheat prices, creating a complex revenue impact on the firm. This mini-case underlines that weather risk entails both volume uncertainty and price uncertainty, a double-whammy for agricultural firms and their investors.

Case Study: Weather Shocks in Wheat Markets

To illustrate the impact of weather risk on commodity pricing, consider three simulated scenarios for an upcoming wheat growing season: (1) **Favorable weather**, (2) **Moderate conditions**, and (3) **Severe weather** such as drought. Each scenario generates a distinct price trajectory in the wheat market. Under favorable weather, prices tend to remain stable or decline slightly, particularly at harvest, due to strong yields and potential oversupply. In moderate conditions, prices may rise modestly as the market adjusts to balanced supply and demand. In contrast, severe weather triggers early price rallies as concerns about yield shortfalls emerge, followed by sharp spikes once crop damage becomes evident. For producers and traders, anticipating these divergent price paths is essential for pricing contracts, managing risk exposure, and structuring hedging strategies effectively.

Figure 1. Simulated commodity price paths under three weather scenarios.
Simulated Price Paths
Source: Author’s simulation.

Figure 1. shows the simulation of commodity price paths under three weather scenarios: severe weather (red), moderate weather (orange), and favorable weather (green). A mid-season weather forecast alert (Day 15) triggers a shift in market expectations, causing price divergence. This simulation illustrates how weather shocks and forecasts impact commodity pricing through volatility and revised yield expectations.

From a risk management perspective, tools exist to handle these contingencies. Farmers or firms concerned about catastrophic weather can turn to weather derivatives for protection. Weather derivatives are financial contracts (often based on indexes like temperature or rainfall levels) that pay out based on specific weather outcomes, allowing businesses to offset losses caused by adverse conditions. They have been used by a wide range of players – from utilities hedging warm winters, to breweries hedging late frosts. These instruments can be customized over-the-counter or traded on exchanges. Notably, CME Group lists standardized weather futures and options tied to indices such as heating degree days (HDD) and cooling degree days (CDD) for various cities. The existence of such contracts means that even when commodity producers cannot fully insure their crop yield, they might hedge certain aspects of weather risk (like an unusually hot summer) via financial markets. In our context, a wheat farmer worried about drought could, say, buy a weather option that pays off if rainfall falls below a threshold, providing funds when their crop output (and thus futures position) suffers.

Climate-Based Volatility in Derivatives Pricing

How can weather uncertainty be incorporated into derivative pricing models? Classic option pricing, such as the Black-Scholes-Merton model, assumes a fixed volatility for the underlying asset’s returns. For agricultural commodities, that volatility is anything but constant – it ebbs and flows with the weather and seasonal progress. Practitioners thus often use stochastic volatility models or at least adjust the volatility input over time. For example, one might use higher volatility estimates during the crop’s growing season and lower volatility post-harvest when output is known. This practice parallels how equity traders anticipate higher volatility in stock prices ahead of major earnings or profit announcements, and lower volatility after the announcement of profits by the firm.

Like companies facing performance surprises, weather shocks inject information asymmetry into the market, which must be priced into the option premiums. This aligns with the observed Samuelson effect, where futures contracts on commodities tend to have higher volatility when they are near maturity (coinciding with harvest uncertainty).

Market prices of options themselves reflect these expectations. When a looming weather event is expected to cause turmoil, options premiums will rise. The metric capturing this is implied volatility – the volatility level implied by current option prices. Implied vol is essentially forward-looking and will jump if traders foresee choppy waters ahead. Empirical evidence shows that extreme weather forecasts translate into higher implied vols for crop options. In 2012, as drought fears intensified, corn option implied volatility spiked (alongside futures prices). Conversely, once a forecasted drought started being relieved by rains, implied volatility eased off, signaling that some uncertainty had been resolved. A recent study also found that integrating meteorological data (like rainfall and temperature anomalies) into volatility modeling significantly improves the ability to hedge risk in agricultural markets. In other words, the more information we feed into our models about the climate, the more accurately we can price and hedge these derivatives.

Figure 2. Implied Volatility of Crop Options Over Time with Weather Events
Line chart showing implied volatility of crop options over 12 months with spikes linked to weather events
Source: Author’s simulation.

This simulation illustrates the evolution of implied volatility over a 12-month crop cycle. Forecasted climate events—drought (Month 3), frost (Month 6), heatwave (Month 8), and rainfall shortage (Month 11)—lead to moderate but distinct volatility spikes. As uncertainty resolves, volatility returns to baseline.

One practical approach to pricing under climate uncertainty is to use scenario-based or simulation-based models. Instead of assuming a single volatility number, an analyst can simulate thousands of possible weather outcomes (perhaps using historical climate data or meteorological forecast models) and the corresponding price paths for the commodity. Each simulated price path yields a payoff for the derivative (e.g. an option’s payoff at expiration), and by averaging those payoffs (and discounting appropriately), one can derive a weather-adjusted theoretical price. This Monte Carlo style approach effectively treats weather as an external random factor influencing the commodity’s drift and volatility. It’s particularly useful for complex derivatives or when the payoff depends explicitly on weather indices (such as a derivative that pays out if rainfall is below X mm).

When the derivative’s underlying is the commodity itself (e.g. a corn futures option), traditional risk-neutral pricing arguments still apply, but the challenge is forecasting volatility. Traders often adjust the volatility smile/skew on agricultural options to account for asymmetric weather risks – for instance, if a drought can cause a much bigger upside move than a rainy season can cause a downside move, call options might embed a higher implied volatility (reflecting that upside risk of price spikes). This is observed in practice as well; extreme weather events can distort the implied volatility “skew” of crop options, as out-of-the-money calls become more sought after as disaster insurance.

In contrast, if the derivative’s underlying is a pure weather index (say an option on cumulative rainfall), then pricing becomes more complex because the underlying (rainfall) is not a tradable asset. In such cases, the Black-Scholes-Merton formula is not directly applicable. Instead, pricing relies on actuarial or risk-neutral methodologies that incorporate a market price of risk for weather. For example, one method is to estimate the probability distribution of the weather index from historical data, then add a risk premium to account for investors’ risk aversion to weather variability, and discount expected payoffs accordingly. Another method uses “burn analysis” – taking historical weather outcomes and the associated financial losses/gains had the derivative been in place, to gauge a fair premium. Academic research has proposed models ranging from modified Black-Scholes-Merton-type formulas for rainfall (with adjustments for the non-tradability) to advanced statistical models (e.g. Ornstein-Uhlenbeck processes with seasonality for temperature indices. The key takeaway is that whether it’s directly in commodity options or in dedicated weather derivatives, climate factors force us to go beyond textbook models and embrace more dynamic, data-driven pricing techniques.

Why should I be interested in this post?

For an ESSEC student or a young finance professional, this topic sits at the intersection of finance and real-world impact. Understanding weather risk in markets is not just about farming – it’s about how big data and climate science are increasingly intertwined with financial strategy. Agricultural commodities remain a cornerstone of the global economy, and volatility in these markets can affect food prices, inflation, and even economic stability in various countries. By grasping how to value derivatives with climate-based volatility inputs, you are gaining insight into a growing niche of finance that deals with sustainability and risk management. Moreover, the skills involved – scenario analysis, simulation modeling, blending of economic and scientific data – are highly transferable to other domains (think energy markets or any sector where uncertainty reigns). In a world facing climate change, expertise in weather-related financial products could open career opportunities in commodity trading desks, insurance/reinsurance firms, or specialized hedge funds. Ultimately, this post encourages you to think creatively and interdisciplinarily: the best hedging or valuation solutions may come from combining financial theory with environmental intelligence.

Related posts on the SimTrade blog

   ▶ Camille KELLER Coffee Futures: The Economic and Environmental Drivers Behind Rising Prices

   ▶ Jayati WALIA Implied Volatility

   ▶ Akshit GUPTA Futures Contract

   ▶ Anant JAIN Understanding Price Elasticity of Demand

Useful resources

Chicago Mercantile Exchange (CME) Weather futures and options product information. (Exchange-traded weather derivative contracts on temperature and other indices)

U.S. Energy Information Administration Drought increases price of corn, reduces profits to ethanol producers (2012). (Article discussing the 2012 drought’s impact on corn prices and volatility)

Nature Communications (2024) Financial markets value skillful forecasts of seasonal climate. (Research showing that seasonal climate outlooks have measurable effects on implied volatility and market uncertainty)

Das, S. et al. (2025) Predicting and Mitigating Agricultural Price Volatility Using Climate Scenarios and Risk Models. (Academic study demonstrating the integration of climate data into volatility models and using Black-Scholes to value a government price support as a put option)

Pai, J. & Zheng, Z. (2013) Pricing Temperature Derivatives with a Filtered Historical Simulation Approach. (Discussion of why Black-Scholes is not directly applicable to weather derivatives and alternative pricing approaches)

About the author

The article was written in May 2025 by Mathias DUMONT (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2022-2026).

Understanding Break-even Analysis: A Key Financial Technique

Olivia BRÜN

In this article, Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026) analyses the concept of break-even analysis, a widely used financial technique employed to determine business profitability. This article illustrates the method in a case study of Watches of Switzerland Group, a publicly listed upscale watch retailer with its headquarters in the United Kingdom.

Introduction and Context

Break-even analysis is a critical component of managerial decision-making and financial planning. It allows companies to determine the level (volume) of sales that will cover all costs, both variable and fixed, before the company can be profitable. The break-even point is a crucial milestone in the operations of a firm. Sales below the break-even point create losses, while sales above it enable every extra unit sold to contribute to overall profitability.

This method is widely used in various industries to evaluate new projects, determine pricing strategies, and examine the financial feasibility of corporate decisions. Especially in capital-intensive industries or businesses focused on product offerings, understanding the break-even point is key to sound financial management and setting realistic sales targets.

History of the Concept

Break-even analysis stems from cost-volume-profit (CVP) analysis. Originating in managerial accounting in the early 20th century, CVP distinguishes between fixed costs (independent of production volume) and variable costs (dependent on production volume). By comparing these costs to projected revenues, decision-makers can identify the break-even point.

Case Study: Watches of Switzerland Group

This case study applies the break-even method to Watches of Switzerland Group PLC, a retailer of high-end watches. The following figures are taken from the company’s 2022 Annual Report:

For full financial details, see the official Watches Annual Report (2022).

Using these values, we compute the variable cost per unit and contribution margin per unit as follows:

  • Variable cost per unit: £3,132 (= £966.5 million / 308,560)
  • Contribution margin per unit: £1,868 (= £5,000 – £3,132 )

Break-even point (units): 220,128 units (= Fixed Costs / Contribution Margin per Unit = £411.2 million / £1,868).

At the break-even point, total revenues and total costs are approximately £1.1 billion. Sales above this point generate operating profit.

Break-even Chart from Excel

The chart below illustrates the relationship between total revenue and total cost across different sales volumes. The break-even point is located where the two lines intersect, at approximately 220,128 units, equivalent to around £1.1 billion in revenue. This marks the threshold at which the company covers all fixed and variable costs, resulting in neither profit nor loss.

The underlying Excel model (see “READ ME” tab for detailed explanations) allows for interactive analysis. Users can adjust inputs such as fixed costs, average selling price, and variable cost per unit. The break-even point updates automatically, making the tool highly practical for scenario analysis and financial planning. This kind of sensitivity analysis is essential in real world decision making, especially in industries with high fixed costs like luxury retail.

Break-even Analysis for Watches of Switzerland GroupBreak-even Analysis for Watches of Switzerland Group
Source: Excel computation based on data from Watches of Switzerland Group

You may download the Excel file used to do the computations and produce the chart above.

Download the Excel file to compute the breakeven point

Why should I be interested in this post?

Break-even analysis is fundamental in both theoretical and applied finance. It is widely used in consultancy, financial planning, and entrepreneurship. Understanding this concept allows business professionals to assess cost structures, pricing strategies, and financial viability of new projects.

For an ESSEC student pursuing business or finance, mastering break-even analysis equips you to analyze operational leverage and forecast how profits change with varying sales levels. This insight helps in making informed strategic decisions, managing risk, and ensuring sustainable business growth.

Useful resources

Academic resources

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015) Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education. – This foundational textbook offers detailed explanations of break-even analysis, cost behavior, and their relevance in managerial decision-making.

Atrill, P., McLaney, E. (2022) Management Accounting for Decision Makers (10th ed.). Pearson.
– This book focuses on applying break-even and contribution analysis in real business contexts, helping students and professionals make informed financial decisions.

Gallo, A. (2014) A Quick Guide to Breakeven Analysis Harvard Business Review.

Business resources

Watches of Switzerland Group

Watches of Switzerland Group (2022) Annual Report and Accounts 2022

About the author

The article was written in May 2025 by Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026), 2022–2026).

My Internship Experience at The Ministry of Citizenship and Multiculturalism

Adelaide RIDER-NICHOLSON

In this article, Adelaide RIDER-NICHOLSON (ESSEC Business School, Global Bachelor in Business Administration (GBBA) – Exchange Student, 2025) shares their internship experience with the Government of Canada at the Ministry of Citizenship and Multiculturalism. They explore the structure of the Ministry, its mandate, and their involvement in policy research and community engagement projects.

About the Ministry of Citizenship and Multiculturalism

The Ministry of Citizenship and Multiculturalism is a part of the Government of Canada and is responsible for advancing inclusive policies, promoting multicultural values, and ensuring that newcomers and minority communities are supported through public services and community initiatives. The Ministry plays a critical role in shaping Canada’s multicultural identity and ensuring equitable access to opportunities across all communities.

Logo of Government of Ontario.
Logo of Government of Ontario
Source: the Government of Ontario.

As a public institution, the Ministry’s focus is not profit-driven but centered on social impact, public service, and civic responsibility. Its work ranges from supporting newcomer integration, funding ethnocultural community organizations, and developing anti-racism strategies to promoting civic engagement and Canadian values of pluralism and diversity.

The Working Process

Like many public service departments, the Ministry follows a structured approach to designing and implementing programs. This process often involves:

Step 1: Policy Mandate & Strategic Planning

All projects begin with a mandate from the provincial or federal government. These directives outline focus areas — such as improving access to services for racialized communities or enhancing civic education among youth. Strategic planning follows, during which interdepartmental teams define objectives, allocate resources, and consult stakeholders.

Step 2: Research and Community Engagement

To ensure that initiatives reflect lived experiences, the Ministry often conducts stakeholder engagement, community consultations, and data analysis. As an intern, I was involved in this step—compiling demographic reports, preparing surveys, and participating in virtual town halls with community leaders and non-governmental organizations (NGOs).

Step 3: Policy Development and Program Delivery

Once the research and feedback are analyzed, policy advisors draft policy proposals or refine programs. These may include funding frameworks, anti-racism toolkits, or educational materials. Interns assist by reviewing comparative policy models, drafting briefing notes, or supporting communications plans for public outreach.

Each level of the organization plays a specific role—from data collection and research at the analyst level to shaping the long-term vision of the Ministry at the executive level. Cross-functional teamwork is essential, especially between communications, operations, and policy units.

Work Environment & Ethics

Working at the Ministry was defined by its strong commitment to equity, inclusion, and accountability. Unlike the private sector, timelines are often influenced by legislative cycles and public consultations, which means balancing patience with precision. The emphasis on confidentiality and clarity in communication is paramount—every briefing note or report may eventually inform public policy.

Colleagues were incredibly supportive and willing to share their career journeys in public service. Weekly check-ins, mentorship coffee chats, and access to learning portals created a welcoming and growth-oriented atmosphere.

One important takeaway was the Ministry’s emphasis on evidence-based policy—decisions were never rushed and were always informed by extensive research and inclusive dialogues.

Required skills and knowledge

During my internship at the Ministry of Citizenship and Multiculturalism, I developed a balanced mix of hard and soft skills essential for a career in public policy and beyond. On the technical side, I strengthened my analytical abilities by working with demographic data, preparing briefing notes, and evaluating policy frameworks with measurable outcomes. I also became proficient in using government reporting tools and adhering to formal policy-writing standards. Equally important were the soft skills I honed: navigating cross-cultural communication during community consultations, adapting to a formal bureaucratic environment, and presenting complex findings in a clear, accessible way for both internal and public stakeholders. These experiences sharpened my critical thinking, diplomacy, and attention to detail—skills that are invaluable for any ESSEC student aiming to lead responsibly in business, government, or international organizations.

What I learned

One of the most impactful lessons I learned during my internship was how deeply interconnected public policy is with real-world social outcomes. I gained a clearer understanding of how decisions made at the ministry level directly influence funding for grassroots organizations, support for immigrant communities, and the implementation of inclusive practices across the province. I also came to appreciate the importance of patience and persistence in government work—policy change is often gradual, requiring continuous stakeholder engagement and rigorous documentation. Perhaps most importantly, I learned how to approach complex social challenges with a structured, evidence-based mindset, and how public institutions balance political direction with long-term societal goals.

Financial concepts related to my internship

I present below three financial concepts related to my internship: public budgeting, cost-benefit analysis, and grant funding allocation. These concepts were central to my work at the Ministry of Citizenship and Multiculturalism and helped me understand how financial principles are applied in public policy decision-making.

Public Budgeting

Public budgeting is the process by which government departments plan, allocate, and manage financial resources in alignment with policy goals. During my internship, I observed how the Ministry sets budget priorities based on strategic objectives such as promoting multiculturalism and supporting newcomer integration. This involved reviewing financial plans, aligning spending with program goals, and ensuring accountability in how public funds are used. Through this, I gained an understanding of how budgets are not just numbers but reflect broader social and political commitments.

Cost-Benefit Analysis

Cost-benefit analysis (CBA) is a tool used to evaluate the efficiency of public programs by comparing expected costs with anticipated benefits. I encountered this concept while working on internal policy reviews, where analysts used CBA to assess the viability of expanding or adjusting government initiatives. For example, I contributed to a report evaluating the effectiveness of community grants in reducing barriers for racialized youth. CBA helped inform whether the social outcomes achieved justified the public investment, which is crucial for responsible policy-making.

Grant Funding Allocation

Grant funding allocation refers to the process of distributing government funds to external organizations that align with specific policy objectives. One of my key tasks was helping review grant applications from community groups. This required assessing the financial soundness of proposals, projected outcomes, and how well each initiative aligned with Ministry goals. I learned how financial evaluation, transparency, and strategic impact all factor into deciding which organizations receive public funding. This experience deepened my appreciation for the financial scrutiny that underpins every public dollar awarded.

Why should I be interested in this post?

For an ESSEC student passionate about business, finance, and public impact, this internship experience highlights how government institutions like the Ministry of Citizenship and Multiculturalism play a vital role in shaping inclusive economic policies and managing resource allocation across diverse communities. Understanding how policy is developed, funded, and implemented not only broadens your perspective on governance but also strengthens your ability to assess financial decisions through a social lens. This exposure is especially relevant for those aiming to work in ESG investing, impact consulting, or public-private partnerships—where financial strategy and social responsibility go hand in hand.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Talia HAMMOUD My internship experience at Little Friends for Peace

   ▶ Louise PIZON Village Community Bank (VICOBA)

Useful resources

Government of Canada – Multiculturalism and Anti-Racism Program – Official site providing information on funding programs and strategies to promote equity and inclusion.

Statistics Canada – Immigration and Ethnocultural Diversity Statistics – Demographic data and analytical reports essential for evidence-based policy decisions.

OECD – Public Integrity – International best practices and frameworks on transparency and ethical governance.

Treasury Board of Canada Secretariat – Policy on Results – Framework for planning, measuring, and reporting on public sector performance.

About the author

The article was written in May 2025 by Adelaide RIDER-NICHOLSON (ESSEC Business School, Global Bachelor in Business Administration (GBBA) – Exchange Student, 2025).

Hyperinflation in Hungary: 1945-1946

Hyperinflation in Hungary: 1945-1946

Anant Jain

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the hyperinflation in Hungary during the period 1945-46.

Introduction

Hungary was affected by one of the most severe hyperinflation episodes ever seen, which was caused by the aftermath of World War II. During this time, from August 1945 to July 1946, the monthly inflation rate exceeded 19,000 percent as prices skyrocketed.

Causes Of Hyperinflation

Certain factors contributed to the economic and social catastrophe the country experienced:

War Devastation

The Economy of Hungary was in a very poor place due to the physical damage experienced in World War II. The war resulted in lost factories, bridges, railways, as well as the land that was destroyed rendered the supply chain and industrial output even further crippled. Many farms were also affected as huge portions of the land went wild and a lot of the required equipment was decimated as well.

Reparations & Occupation

Hungary was obligated to pay reparations to the Soviet Union, placing a significant strain on its economy. The Soviet occupation further exacerbated the situation by extracting resources, including raw materials and industrial goods, which were sent to the Soviet Union.

Excessive Money Printing

As a response to the economic issues, the Hungarian government drastically increased the money supply in an attempt to address economic concerns, which worsened the situation revealing the deficiencies of the Hungarian pengő. The central government continuously introduced bigger and bigger banknotes into the economy, but this only made the situation worse. The peak of this chaos ended in the introduction of the 100 quintillion pengo banknote which happened at the end of the hyperinflation period.

Figure 1. Banknotes In Circulation 1945-1946.
Title
Source: Peter Z. Grossman – Butler Digital Commons

The Extent of Hyperinflation

Hyperinflation peaked in July 1946, with prices doubling approximately every 15 hours. The highest inflation rate was estimated to be at 350% in the worst day and in its course, the value of the pengo began to lessen and when this era came to an end, it meant that 1 dollar was almost equivalent to 59 billion pengos. The sad case was that inflation bred poverty, this cycle would leave the masses struggling.

Impact on Society

The hyperinflation had devastating effects on Hungarian society:

Savings Wiped Out

People’s life savings were rendered worthless almost overnight. Many individuals who had saved diligently for years found themselves destitute. The middle class, in particular, was hit hard, as their financial security evaporated in a matter of months.

Barter System

The trade of products and services through the bartering system saw a massive resurgence. All sorts of markets began to trade items such as foodstuff, clothing and tools directly, thus avoiding the worthless currency. In this way, the barter system remained inefficient and further made daily life more difficult to manage.

Economic Instability

Businesses struggled to operate in such an unpredictable economic environment, leading to widespread closures and unemployment. Employers could not pay their workers in stable currency, and many businesses went bankrupt. The lack of a stable currency also hindered investment and economic planning.

Efforts To Stabilize The Situation

On August 1, 1946, the Hungarian government attempted to curb hyperinflation by introducing forint currency, substituting pengõ at rate of four hundred octillion pengos per unit of forint. The introduction of this currency was a major step towards the reclamation of the economy, yet it must be noted that the currency was coupled with other very important factors of the economy as well.

Monetary Reform

Through monetary reform, the government put in place restrictions that were aimed at minimizing the money supply, and thereby inflation. This included an end to printing money to the extreme and guaranteeing that the new currency is fully backed by tangible assets. These were necessary conditions for enhancing public confidence in the currency and in managing inflation.

Pengő tax reform

In the hyperinflationary context, a temporary measure, designated “tax pengő index,” was implemented. Operating on a daily basis, this system served to smoothen the conversion rates with the changes in the prices which helped the transactions to be adequately organized and the control over the economy to some extent restored.

Economic Reforms

In combination with the monetary reform, the government undertook much more comprehensive measures with the goal of directing the rebuilding of the economy. It included actions intended to boost industrial output, increase agricultural production and restore hidden economy. These reforms were significant in setting the stage for enduring and efficient economic policies.

4. International Aid and Cooperation

Hungary also received assistance from international organizations and allied nations. This aid was vital in providing the necessary resources for economic recovery and in supporting the stabilization efforts. International cooperation played a significant role in Hungary’s ability to overcome the hyperinflation crisis.

Impact On Today’s Hungarian Economy

The hyperinflation that went through Hungary in the years of 1945-46 shaped the country turning it into what can be viewed as today’s Hungary, and many of those changes became more obvious.

A. Key Economic Takeaway

1. Monetary Policy Awareness

The onslaught of hyperinflation was a serious lesson learnt by Hungary in managing the basics of monetary policy. Even this single historical experience of the country has changed how it thinks about inflation and more so about currency stability as it makes them very conscious about the chances of inflation and printing of money beyond acceptable limits.

2. Economic Reforms and Stability

The time of hyperinflation masqueraded the need for deep economic reforms including the inception of the new currency the forint and monetary dispensations. These reforms transformed the prospects of the Hungarian economy as one seeking sound management and policy measures to avert crises.

3. Institutional Strengthening

The lesson from the crisis was strong financial institutions and supervision is essential. In the last decades, Hungary has tried to create such capable institutions in order to cope with future economic shocks and secure their economy.

B. Social and Cultural Aspects

1. Public Trust In Currency

The hyperinflation phase notably diminished public confidence in its domestic currency, a sentiment that was difficult to restore. Such memories of history have made Hungarians very sensitive to episodes of inflation and depreciation of their currency. This makes Hungarians have an unpredictable attitude regarding policies concerning economic aspects and management of money.

2. Economic Resilience

The economic culture prevailing in Hungary after hyperinflation shows understanding economics and having a variety of ways to adjust in the economy. These experiences of the past are helping an entire generation in restructuring their businesses and household models.

C. Modern Economic Policies

1. Inflation Targeting

The central bank of Hungary ‘Magyar Nemzeti Bank’ (MNB) has adopted an approach of inflation targeting which has become part of its monetary policy framework. This was aimed at maintaining inflation at or between specified levels and focused also on maintaining other aspects of economic growth as well.

2. Fiscal Discipline

Hyperinflation has made Hungarians economically sound. They did learn after the painful experience of economic chaos. The nation is careful to prevent these situations from occurring again by first approaching the problem of balancing the budget while ensuring their public debt stays low.

Conclusion

The hyperinflation which took place in Hungary between 1945 and 1946 is perhaps the single most striking example of what can happen when economic management techniques are not employed and more pertinently how consequential the effects of war can be. While it is often recognized as one of the most severe cases of hyperinflation, only a handful of other instances throughout the world rival it. The key point to be understood from this episode is the significance of having a sound economic policy framework as well as international coordination, particularly for post-war rebuilding purposes.

The years 1945-1946 will be marked in history as the years of hyperinflation in Hungary, and it was devastating for the economy of Hungary. The memories of these years are still fresh and remain close to the countries monetary and fiscal policies. The cost of hyperinflation is now taken care of as many years have gone past, but the impact of hyperinflation can still be seen as ravage in the economy of Hungary. Hungary seems to have adopted a very watchful and strategic approach towards its economy.

Related Posts On The SimTrade Blog

   ▶ Anant JAIN Understanding Hyperinflation

   ▶ Anant JAIN The Ongoing Hyperinflation In Turkey And Its Ripple Effects On European Union

Useful Resources

Econlib: Hyperinflation

JSTOR: The Hungarian Hyperinflation

Nuremberg Media: Hungary’s Hyperinflation

About The Author

The article was written in May 2025 by Anant JAIN ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Bank Of Japan’s 2024 Policy Shift: Ushering In A New Era Of Monetary Policy

Bank Of Japan’s 2024 Policy Shift: Ushering In A New Era Of Monetary Policy

Anant Jain

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Bank Of Japan’s policy shift in 2024.

Introduction

In a significant alteration in its policy in 2024, the Bank of Japan (BoJ) has announced the abandonment of its long- held negative interest rate policy alongside the discontinuation of its Quantitative and Qualitative Monetary Easing (QQE) program with Yield Curve Control (YCC). Having made this announcement in September 2024, it is indeed a historic occasion in the economic history of Japan because it mirrors the growth potential of the economy while demonstrating the central banks trust in Japan’s economic recovery and the ability to revert back to a traditional, arms’ length monetary policy stance.

Understanding QQE With Yield Curve Control

Quantitative and Qualitative Monetary Easing (QQE)

Quantitative Easing (QE) involves central banks purchasing financial assets (like government bonds) from the market to increase money supply and stimulate economic activity.

Qualitative Easing (QE) focuses on the types of assets purchased, often including riskier assets (like corporate bonds or equities) rather than just government bonds. The idea is to influence not just the quantity of money but also the quality of the central bank’s balance sheet.

Yield Curve Control (YCC)

YCC involves targeting specific interest rates along the yield curve, typically focusing on short-term and long-term government bond yields. The central bank commits to buying or selling bonds in the market as necessary to keep these yields at or below the target levels.

QQE With Yield Curve Control

In the year 2013, the Bank of Japan incorporated the adoption of QQE With Yield Curve Control as a bold measure to address deflation issues and spur the economy in what was the introduction of its new strategy. It further aimed to influence borrowing and investments through lower interest rates across the entire yield curve by enhancing liquidity in the economy through large upwards shifts in the purchases of government issued bonds and other financial instruments.

The BoJ (on 21st September, 2016) expanded its efforts to implement monetary easing by adding the ability to control the entire yield curve by making appropriate adjustments to the interest rate of Japan’s 10-year government bonds. As a result, this policy resulted in the expansion of high liquidity in the country as Japan’s economy was already forecasted to face deflationary pressures. The policy was aimed at eventually pushing Japan’s economy to higher longer-term interest rates which in turn, would allow for greater economic stability in Japan.

The End Of Negative Interest Rates

Implemented in 2016, the BOJ’s negative interest rate policy was an unconventional measure aimed at stimulating economic activity by imposing a negative rate of -0.1% on excess reserves held by commercial banks. This policy was intended to encourage banks to lend more and invest, thereby boosting consumption and economic growth. However, after 8 years, the BOJ has decided to raise the short-term interest rate to a range of 0% to 0.1%. This shift towards normalization reflects the central bank’s recognition of improving economic conditions and the need to mitigate potential negative effects of prolonged negative rates, such as financial imbalances and reduced bank profitability.

Figure 1: Interest Rates In Japan (X Axis = Years & Y Axis = Interest Rates).
Title
Source: LSEG DataStream | Fathom Consulting

Discontinuation Of QQE With Yield Curve Control

While opting to end the negative interest policy, the BoJ has also opted for the gradual phasing out of its QQE with YCC program. This program, a central part of the BoJ’s approach to achieving its inflation target of 2% in the medium term, was of a gradual practice of large scale buying of assets and managing the yield curve in order to contain long term interest rates. The decision to discontinue this program indicates the BoJ’s belief that the economy is self-sustainable and does not require extraordinary measures to support growth and stable inflation.

Implications For The Japanese Economy

BoJ policy adjustment is likely to yield several changes with regards to different facets of the Japanese economy:

Interest Rates And Borrowing Costs

The removal of negative interest rates suggests that the cost of borrowing for a firm and a consumer is expected to rise. Although this may withdraw consumption and investment at the beginning, it is anticipated that this change in interest rates will encourage a better interaction with money by mitigating chances of asset bubble.

Financial Markets

A gradual return to normal levels of monetary policy may cause turbulence in financial markets as the participants are able to slowly adapt to the changes. However, on the flip side, it does point towards a return of business conditions that are expected to be more stable and predictable which in the long run may boost the confidence of investors.

Banking Sector

The removal of negative rates can in one way enhance the profitability of banking institutions. These financial intermediaries have always been working at unpalatable margins during the prevailing negative rate policy and with the new norm they should be able to make a decent lend and participate more meaningfully at the level of the economy.

Inflation And Economic Growth

The BoJ is confident that inflation will remain on average close to its target rate of 2%. Some of these inflation expectations could allow for better and resistant economic growth as businesses and the general populace refer to the new inflationary tendencies to make more informed decisions.

Global Implications Of The Policy Change Of Bank of Japan

The policies that the Bank of Japan has changed from are vastly relevant not only to Japan but also to the global economic network in general.

Global Financial Markets

As one of the world’s largest economies, changes in Japan’s monetary policy are capable of affecting world financial markets. Countries can supplement their capital structure from Japan after the era of negative interest rates and pooling of assets into the country will take place upon normalization of policy.

Exchange Rates

The shift in policies may have a direct effect on the Japanese yen’s rate. The enhanced interest rates may lead to a more robust yen which would in turn have an effect on Japan’s balance of trade and the cost of their exports. This, in a sense, may modify international trade relations and the economic status of nations that trade with Japan.

Central Bank Policies

Japan’s turn towards normalization, might compel other central banks to reconsider their own money policies especially in view of recovery of economies and the behavior of inflation during the time of recovery. In this respect, one may expect a more widespread pattern of policy tightening of monetary conditions across the globe economy.

Investment Strategies

Investors across the world may be forced to realign their strategies as a result of the new measures put in place by Japan’s key decision makers. Any shifts in interest rates and or conditions within the financial markets in Japan may impact investment strategies in terms of portfolio management and even risk management.

Conclusion

The Bank of Japan’s 2024 policy change is indicative of the beginning of the end for its unconventional monetary policies and is the start of a new chapter in the economic history of Japan. The BOJ, through the removal of negative interest rates and by discontinuing QQE with YCC, is demonstrating its faith in the performance and strength of the economy and is willing to implement more orthodox solutions. It is perceived that this action will have serious ramifications not only for Japanese economy and its financial markets but also for the prevailing global economic environment, paving the way for a more balanced and healthy future economy.

Related Posts On The SimTrade Blog

▶ Bijal GANDHI Interest rates

▶ Youssef LOURAOUI Interest rate term structure and yield curve calibration

Useful Resources

Bank of Japan – Monetary Policy Releases 2024

The Diplomat – What’s Next for Japan’s Economy After Monetary Policy Shift?

Twitter Bank of Japan

About The Author

The article was written in May 2025 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

My Internship Experience in Product Management at MagentaTV (Telekom Germany)

Olivia BRÜN

In this article, Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026) shares her professional experience as a Product Management Intern at MagentaTV, the TV and streaming service of Telekom Deutschland.

About the company

Telekom Deutschland’s flagship product, MagentaTV, supplies a wide variety of TV, streaming, and on-demand media to a large consumer base. Product Management is key to making the platform meet user expectations and align with the strategic goals of the company at large.

My group was tasked with improving customer happiness as part of the broad category of user experience, which encompasses long-term user engagement, content suggestion, and product discovery. This project cut across various industries, involving editorial management, user experience research and studies, marketplace research, and the implementation of customized content plans.

Logo of Telekom Deutschland.
Logo of Telekom Deutschland
Source: the company.

My internship

In the summer of 2023, I completed a two-month internship in the Product Management department of MagentaTV, which is a part of Telekom Deutschland. My duties covered major areas such as Editorial Campaign Management, Conceptual Development, Sales and Customer Journey Mapping, User Experience and Personalization.

As part of this internship, I gained valuable insights into the customer-focused aspects of the entertainment industry tied to Germany’s market-leading telecommunication provider and its management of digital media products. In addition, I was exposed to the intersection of product innovation, marketing technology, and corporate strategy in a large-scale organization.

My missions

During my internship, I was given the following responsibilities:

  • Organizing editorial functions to carry out emphasized content and promotional campaigns.
  • Conducting competitive and market research related to streaming in the DACH region.
  • Assessing customer experience, identifying areas of concern, and recommending improvements.
  • Leading workshops to improve user experience and create innovative product offerings.
  • Contributing to data-driven marketing initiatives, including personalization strategies for various user segments.

By completing these assignments, I gained a hands-on understanding of how consumer demands and technological limitations shape media products. Cross-functional collaboration with marketing, analytics, and user experience (UX) teams offered key insights into organizational dynamics.

Required skills and knowledge

The internship required sound analytical reasoning, structured conceptual thinking, and strong communication skills. Knowledge of consumer behaviour and digital trends was essential, especially in developing personalization strategies and campaign concepts. Technical tools like PowerPoint, Excel, and basic CMS were part of my daily toolkit. Above all, adaptability and attention to detail were vital in a fast-paced environment.

What I learned

My experience at MagentaTV gave me deeper insight into translating customer needs into meaningful product features. I learned how business strategy and product design merge in the context of digital platforms. I also developed an appreciation for how cross-functional teams collaborate across business, editorial, UX, and technical areas to shape user centered media services.

Financial concepts related my internship

Although I didn’t engage directly in financial analysis, my work was informed by a number of financial principles: customer lifetime value (CLV), return on investment (ROI) for campaigns, and subscription-based revenue models.

Customer Lifetime Value (CLV)

Retention strategies and personalization efforts were guided by the aim to increase CLV, a metric assessing the long-term value each customer adds to the business.

Return on Investment (ROI) for Campaigns

Evaluating editorial and marketing initiatives involved understanding KPIs that reflect campaign efficiency in terms of engagement, conversion, and acquisition costs.

Subscription-Based Revenue Models

Working with MagentaTV helped me understand the importance of recurring revenue, churn rates, and customer satisfaction in sustaining subscription-based business models.

Why should I be interested in this post?

This internship is particularly relevant for students interested in digital media, marketing, and product strategy. It illustrates how business thinking, technical execution, and customer engagement converge in real-world settings. It also highlights the importance of user-centric product development as a strategic advantage in subscription-based businesses.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Alexandre VERLET Classic brain teasers from real-life interviews

Useful resources

ForaSoft – Streaming App UX Best Practices
An article offering industry insights into optimal user experience design in streaming applications, relevant to MagentaTV’s personalization and product innovation efforts.

Hotbot – Unlocking the Benefits of MagentaTV in 2023
A feature article exploring the core functionalities and improvements of MagentaTV, shedding light on user experience enhancements from a customer perspective.

Broadband TV News – Deutsche Telekom Relaunches MagentaTV
Covers the major 2024 revamp of MagentaTV, aligning with key initiatives I supported during my internship in product development and editorial strategy.

MIPBlog – Best Interfaces of Streaming Platforms
Compares interface design across major platforms and positions MagentaTV within a competitive UX landscape — highly relevant to user journey mapping work.

About the author

The article was written in May 2025 by Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026), 2022–2026).

My Professional Experience Working as a Strategy Intern at ANXO Management Consulting

Olivia BRÜN

In this article, Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026) shares her professional experience as a Strategy Intern at ANXO Management Consulting.

About the company

ANXO is a moderately sized consultancy company based in Frankfurt am Main, Germany. The firm specializes in strategy development, organizational restructuring, transformation processes, and digitalization, offering its services to public and private sector organizations. ANXO guides organizations through complex change processes while also supporting the creation of sustainable strategic projects.

Logo of ANXO Management Consulting.
Logo of ANXO
Source: the company.

I was with one team during my internship and provided support to partners on specific projects from time to time. I supported consultants in organizing internal and external workshops, assisted in the coordination of meetings, and was involved in communications and marketing functions.

My internship

From late May to mid-August 2024, I completed a three-month full-time internship at ANXO Management Consulting GmbH. As a Strategy Intern, I was involved in various internal and external projects, worked on client-related projects, attended association events, and supported projects across the whole organization.

One of the key aspects of my internship was working with Ralf Strehlau, President of the Federal Association of German Management Consultants (BDU) and Managing Director of ANXO. This experience gave me important insights into the operations of consultancy companies with regards to business and industry representation.

My missions

My tasks included:

  • Conducting analysis of industry trends and competitive forces for project leadership and consultants.
  • Organizing and documenting workshops and strategic planning sessions in the organization.
  • Enabling autonomous collaboration between internal divisions, clients, and professional bodies.
  • Planning a client-focused business trip to Düsseldorf and coordinating a VR pipeline demonstration at a trade show.
  • Helping in the formulation and organization of ANXO’s web relaunch initiative.
  • Organizing internal corporate functions involving management staff and consultants.

Required skills and knowledge

The internship required a high degree of self-management, professional communication skills, and the ability to work independently under strict time constraints. The ability to quickly absorb and analyze information and then convert it into practical outcomes was particularly critical.

Analytical research skills were necessary, especially for competitive analysis and preparing reports used in association meetings. Attention to detail and maintaining high standards in communication and operations were key to delivering value in a consultancy environment.

What I learned

My time at ANXO gave me a practical and contextualized understanding of the consultancy sector, especially within a medium-sized organization. I developed transferable skills in research, communication, and stakeholder engagement.

Taking part in a public trade fair presentation and collaborating with clients highlighted the importance of clear, confident communication in business settings. This experience helped me gain a deeper appreciation for the structured, analytical, and people-oriented nature of consulting work.

Financial concepts related my internship

I present below three financial concepts related to my internship: project cost awareness, resource utilization, and consulting business models.

Project Cost Awareness

While coordinating meetings and planning travel, I became more aware of how resource planning and time budgeting affect the implementation of consulting projects. For mid-sized firms juggling multiple projects, managing these elements efficiently is essential to financial sustainability.

Resource Utilization

I observed how consultants allocated time across various projects and tasks. This gave me initial exposure to utilization rates — a vital performance metric in consulting that affects staffing and overall profitability.

Consulting Business Models

Through internal coordination and client engagement support, I gained familiarity with the business economics of consulting firms, including time-based billing, project pricing strategies, and the economics of client retention.

Why should I be interested in this post?

This internship gave me practical insight into the consultancy industry and the dynamics of a medium-sized firm. For ESSEC students curious about project delivery, strategy, or professional services, this experience offers a realistic preview of consulting work, with its mix of analytical, operational, and interpersonal challenges.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Alexandre VERLET Classic brain teasers from real-life interviews

Useful resources

Financial Times German consulting firms grow amid increased demand
An article discussing the growth of consulting firms in Germany, highlighting trends relevant to mid-sized strategy firms like ANXO.

Dartmouth CPD – Consulting 101 Resource
An overview of consulting industry fundamentals, useful for students exploring roles and skills relevant to consulting internships.

About the author

The article was written in May 2025 by Olivia BRÜN (ESSEC Business School, Global Bachelor in Business Administration (BGBA), and ESIC Business School, Bachelor of Business Administration and Management (BBAM), 2022–2026), 2022–2026).

Optimal capital structure with no taxes: Modigliani and Miller 1958

 Snehasish CHINARA

In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2025) explores the optimal capital structure for firms, which refers to the balance between debt and equity financing. This post dives into the article written by Modigliani and Miller (1958) which explores the case of no corporate tax and a frictionless market (no bankruptcy costs).

Introduction to Capital Structure

Capital structure refers to the mix of debt and equity financing that a company uses to fund its operations and growth. It is a critical component of corporate finance, as it directly impacts a firm’s cost of capital, financial risk, and overall valuation. The choice of capital structure affects a company’s ability to raise funds, weather economic downturns, and pursue strategic investments.

Capital structure is reflected in a company’s balance sheet, which provides a snapshot of its financial position at a given point in time. Specifically, it is composed of two primary financing sources:

  • Debt (Liabilities) – Found under the Liabilities section, debt includes short-term borrowings, long-term loans, bonds payable, and lease obligations. Debt financing requires periodic interest payments and repayment of principal, increasing financial obligations but also benefiting from potential tax shields.

  • Equity (Shareholders’ Equity) – Located under the Shareholders’ Equity section, equity includes common stock, preferred stock, retained earnings, and additional paid-in capital. Equity financing does not require fixed interest payments but dilutes ownership among shareholders.

Table 1 below gives a simplified version of a balance sheet.

Table 1 – Simplified Balance Sheet Example

Table 1 shows that the firm finances its $350M in assets with $140M in debt (40%) and $210M in equity (60%), demonstrating a debt-to-equity ratio of 0.67 (=140/210). Additionally, the debt ratio, D/(D+E), measures the proportion of total financing that comes from debt 40% (=140/(140+210)). This indicates that a significant portion of capital is funded through borrowed money, allowing the company to take advantage of the use of debt, but also exposing it to higher financial risk if it faces difficulties in meeting debt obligations. These ratios are a few key indicators used to assess a company’s financial leverage and risk exposure.

A higher reliance on debt can lead to increased financial risk due to interest obligations, while too much equity financing may dilute shareholder returns. Therefore, finding an optimal capital structure is crucial for maintaining a healthy balance between risk, return, and financial stability.

Capital structure is one of the most fundamental decisions in corporate finance, influencing a firm’s financial stability, cost of capital, and overall value. At the heart of this discussion lies the Modigliani-Miller (M&M) theorems (M&M 1958 and M&M 1963), which provides the foundational framework for understanding how a company’s choice between debt and equity affects its valuation. However, while MM’s initial work (1958) proposed that capital structure is irrelevant in a frictionless market, real-world complexities such as taxation, bankruptcy costs, and financial distress challenge this assumption, leading to more nuanced theories.

The Modigliani-Miller 1958 Theorem (M&M 1958)

The Modigliani-Miller theorem (M&M 1958), introduced in 1958 by Franco Modigliani and Merton Miller, is a cornerstone of modern corporate finance. It provides a theoretical framework for understanding the role of capital structure in determining a firm’s value. M&M 1958’s core argument is that in a perfect market, a firm’s value is independent of its capital structure, meaning that the choice between debt and equity financing has no impact on firm valuation.

M&M 1958 Proposition I: Capital Structure Irrelevance

For the problem of the determination of the optimal capital structure of the firm, we assume that the firm (and its managers) seek to maximize the financial or economic value of the shareholders’ equity.

M&M’s first proposition states that, in a world with no taxes, no transaction costs, and perfect information, the total value of a firm (V) is unaffected by its financing decisions. Whether a company is financed with 100% equity, 100% debt (almost), or any combination of both, its market value remains the same because investors can create their own leverage through homemade financing.

M&M’s first proposition says that a company’s value is determined by its business operations (profits, assets, and growth potential), not by how it finances those operations. Since in a perfect world, investors can create leverage on their own. If a company doesn’t use debt, an investor can borrow money separately to create the same effect. This means that whether the company uses debt or not, its overall value remains the same.

For a firm with market value V, total assets A, and financed by debt D and equity E:

According to M&M Proposition I, in a frictionless world:

where:

  • VL is the value of a levered firm using debt.

  • VU is the value of a unlevered firm not using debt but only equity

Key Assumptions:

  • No taxes (in reality, firms pay corporate taxes).

  • No bankruptcy costs (in reality, firms pay costs if they go bankrupt).

  • No financial distress (in reality, too much debt can make investors nervous).

Figure 1. Firm Value vs Debt Ratio according to M&M 1958: Proposition I

In Figure 1, according to M&M 1958 Proposition I, the firm value remains constant regardless of the debt ratio. The flat blue line represents the idea that whether a firm is 100% equity-financed or takes on debt, its total value does not change in a perfect world with no taxes, no bankruptcy costs, and no market imperfections.

M&M 1958 Proposition II: Cost of Equity and Leverage Relation

While M&M Proposition I states that firm value is independent of capital structure, Proposition II explains how leverage affects the cost of equity (and then then total cost of financing measured by the weighted average cost of capital or WACC). It shows that as a firm increases its debt, equity becomes riskier, leading to an increase in the cost of equity (rE) to compensate for higher financial risk.

When a firm increases its leverage, its cost of debt (rD) is typically lower than its cost of equity (rE) due to the priority of debt holders in the capital structure and the fixed nature of interest payments. However, as leverage rises, the firm’s equity becomes riskier because debt obligations take precedence, amplifying the volatility of residual earnings available to shareholders. According to Modigliani-Miller Proposition II, this higher financial risk leads to an increase in the required return on equity (rE), as shareholders demand greater compensation for bearing the amplified risk exposure.

where:

  • rE = cost of equity for a levered firm

  • rU = cost of equity for an unlevered firm

  • rD = cost of debt

  • D/E = debt to equity ratio measuring leverage

This formula highlights that with higher leverage, the cost of equity increases, offsetting any benefit from the lower cost of debt. Thus, while leverage amplifies returns, it also raises financial risk, maintaining the firm’s overall cost of capital.

Shareholders bear more risk as leverage increases due to the following reasons –

  • Residual Claimants: Shareholders are last in line for cash flows, meaning higher debt increases fixed interest obligations, reducing the certainty of equity returns.

  • Earnings Volatility: With more debt, small fluctuations in operating profits cause larger swings in equity returns, making equity riskier.

  • Default & Financial Distress Risk: If debt levels rise too much, the firm faces a higher probability of default or financial distress, further increasing required equity returns.

WACC according to M&M 1958 Proposition II

The Weighted Average Cost of Capital (WACC) is a key financial metric that represents a firm’s overall cost of financing by combining the costs of equity and debt. Under Modigliani-Miller Proposition II (1958), the WACC is given by the formula:

Where:

  • WACC = Weighted Average Cost of Capital

  • E = Value of equity

  • D = Value of debt

  • rE = Cost of equity (which increases with leverage)

  • rD = Cost of debt (fixed by assumption)

M&M 1958 Proposition II states that as a firm increases its debt financing, its cost of equity rE rises to compensate for the additional financial risk. However, because debt is cheaper than equity, the lower cost of debt rD balances out the increase in rE, keeping WACC constant.

Figure 2. Modigliani-Miller View Of Gearing And WACC: No Taxation (MM 1958 Proposition II)

Based on Figure 2, implication for firms are as follows:

  • In a world with no taxes and bankruptcy costs, leverage does not create or destroy firm value.

  • Higher leverage increases equity risk, leading to higher required returns for shareholders.

  • The Weighted Average Cost of Capital (WACC) remains constant regardless of debt-equity mix.

If a company borrows money (takes on debt), it must pay interest no matter how well the business performs. If profits drop, shareholders get whatever is left after paying the debt, which makes equity riskier. Because of this extra risk, shareholders demand a higher return, which increases the cost of equity.

Case Study: Implications of M&M 1958 (Optimal Capital Structure with no taxes)

Alpha Corp operates in a perfect capital market (no taxes, no bankruptcy costs, and no market imperfections). It has two financing options:

  • Option 1: Fully equity-financed (No debt)

  • Option 2: 40% Debt, 60% Equity

Each option funds a $100 million investment that generates an annual operating income of $10 million. The risk-free interest rate is 5%, and the required return on equity is 10%.

Figure 3. Simplified Balance Sheet of Alpha Corp

Table 2. M&M 1958: an Example

Based on Table 2, the key takeaways are as follows:

1. Firm Value Remains Constant

  • In both financing scenarios (100% Equity vs. 40% Debt, 60% Equity), the total value of the firm remains $100M.

  • This aligns with Modigliani-Miller Proposition I (1958), which states that in a perfect capital market, capital structure does not impact firm value.

2. Cost of Equity Increases with Leverage

  • In the 100% equity scenario, the required return on equity (rE) is 10%.

  • When the firm takes on 40% debt, the cost of equity (rE) increases to 13%, reflecting the additional financial risk borne by equity holders.

  • This aligns with Modigliani-Miller Proposition II (1958), which states that as leverage increases, equity holders require a higher return due to increased financial risk.

3. WACC Remains Constant

  • Despite the change in capital structure, the Weighted Average Cost of Capital (WACC) remains at 10%.

  • This reinforces M&M Proposition II, which states that in a perfect market, using debt does not lower the firm’s overall cost of capital.

4. Impact on Cash Flows & Present Values

  • Equity holders receive lower cash flows ($8M) under 40% debt financing due to interest payments ($2M) to debt holders.

  • However, the present value of debt ($40M) + present value of equity ($60M) = $100M, meaning that the firm’s total value remains unchanged regardless of financing choices.

Computation of Cash Flows and the DCF Approach

Table 3. Cash Flow for shareholders using cost of equity

Table 4. Cash Flow for debt holders using cost of debt

The Discounted Cash Flow (DCF) approach is used to determine the value of equity (E) and debt (D) by discounting their respective cash flows.

1. Cash Flows to Shareholders (Equity Holders)

  • Formula: CF to Equity= Operating Income −Interest Payments

  • Computation:

    • 100% Equity Case:10M−0=10M

    • 40% Debt, 60% Equity Case:10M−2M=8M

2. Cash Flows to Debt Holders

  • Formula: CF to Debt= Interest Payment = Debt × rD

  • Computation: 40% Debt, 60% Equity Case: 40M×5%=2M

3. Present Value (PV) of Equity and Debt Using DCF

Solvency and Insolvency in the Corporate World

 Snehasish CHINARA

In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2025) explores the vital difference between solvency and insolvency—where solvency signals long-term financial health, and insolvency marks a tipping point of distress. Understanding this divide is key to assessing corporate resilience and recovery.

Introduction to Solvency and Insolvency

Solvency refers to the ability of a company to meet its long-term financial obligations and sustain operations over time. It is a measure of financial stability that reflects whether an entity’s total assets exceed its total liabilities, providing a buffer to absorb financial shocks or downturns. A solvent company is one that not only meets its short-term obligations (liquidity) but also maintains a robust capital structure for the long haul.

Insolvency occurs when a company is unable to meet its financial obligations as they come due. This may stem from either insufficient liquidity (cash flow insolvency) or a situation where liabilities exceed assets (balance sheet insolvency). Insolvency is a critical financial distress signal and, if unresolved, can lead to bankruptcy, restructuring, or liquidation.

Key Indicators of Solvency

Assessing solvency requires robust financial metrics that provide insight into a company’s long-term financial stability and its ability to meet obligations. Here are the primary indicators used to evaluate solvency:

Solvency Ratios

Solvency ratios measure a company’s financial leverage and its capacity to sustain operations while servicing debt and other long-term obligations. These ratios are pivotal for stakeholders to evaluate financial resilience.

1. Current Ratio

  • Purpose: Measures the proportion of debt versus equity in a company’s capital structure.

Interpretation:

  • A higher ratio indicates higher reliance on debt, increasing financial risk.

  • A lower ratio suggests a more conservative and stable financial structure.

  • Example: A Debt-to-Equity ratio of 1.5 means the company has $1.50 in debt for every $1 of equity.

  • 2. Interest Coverage Ratio:

    • Reflects the company’s ability to cover its interest payments using earnings before interest and taxes (EBIT).

  • Interpretation:

    • A ratio above 2 is generally considered healthy, indicating sufficient earnings to cover interest expenses.

    • A ratio below 1 signals that the company may struggle to meet interest obligations.

  • Example: A ratio of 3 means the company earns three times its interest expense, indicating financial stability.

  • Cash Flow Analysis

    Cash flow analysis evaluates whether a company generates enough cash from its operations to sustain long-term commitments. Unlike profits, cash flows reflect the actual inflow and outflow of money, providing a clearer picture of financial health.

    1. Operating Cash Flow (OCF):

    • Indicates the cash generated from core business operations.

    • Key Metric: Positive and consistent OCF suggests strong financial health.

    • Example: A manufacturing firm with consistent OCF can comfortably reinvest in growth or repay long-term debt.

    2. Free Cash Flow (FCF):

    Free Cash Flow = Operating Cash Flow−Capital Expenditure

    Free Cash Flow = EBIT × (1−Tax Rate) + Depreciation and Amortization − Change in Working Capital − Capital Expenditures

    • Reflects the cash available for distribution to shareholders or debt repayment after maintaining capital assets.

    • Example: A company with growing FCF can fund expansion or pay down debt without raising additional capital.

    Balance Sheet Strength

    The balance sheet provides a snapshot of a company’s financial position, highlighting its solvency through the relationship between assets, liabilities, and equity.

    1.Net Asset Value (NAV):

    Net Asset Value=Total Assets−Total Liabilities

    • Purpose: Indicates the residual value of a company’s assets after all liabilities are settled.

    • Interpretation: A positive NAV reflects solvency, while a negative NAV signals financial distress.

    • Example: Companies with high NAV relative to liabilities are perceived as stable and creditworthy.

    2.Asset Quality and Liquidity:

    • High-quality assets (e.g., cash, receivables) contribute to solvency by being easily convertible into cash during a crisis.

    • Illiquid or depreciating assets, such as specialized machinery, may erode financial strength.

    3.Leverage and Capital Structure:

    • A balance sheet with excessive liabilities compared to equity may indicate solvency risks.

    • Strong equity reserves act as a cushion against unforeseen losses.

    Types of Insolvency

    Insolvency is a critical financial condition indicating that a company or individual is unable to meet its financial obligations. It is broadly categorized into Cash Flow Insolvency and Balance Sheet Insolvency, each reflecting distinct dimensions of financial distress. Understanding these types is essential for diagnosing financial health and determining appropriate remedies.

    Cash Flow Insolvency

    Cash flow insolvency occurs when an entity is unable to meet its immediate or short-term financial obligations as they come due, even though its assets may exceed its liabilities. This situation often arises from liquidity issues rather than an inherent lack of financial stability.

    Key Characteristics:

    • The entity has sufficient assets but lacks the liquid resources to convert them into cash quickly enough to pay its debts.

    • Typically a temporary condition that can be resolved through effective liquidity management or short-term financing.

    Causes:

    • Poor cash flow management (e.g., delayed collections, excessive inventory buildup).

    • Seasonal business cycles with uneven cash inflows and outflows.

    • Overreliance on credit for operational expenses without adequate cash reserves.

    • External factors such as economic downturns or disruptions in supply chains.

    Balance Sheet Insolvency

    Balance sheet insolvency arises when an entity’s total liabilities exceed its total assets, resulting in negative net worth. This form of insolvency reflects deeper financial distress, often signalling a fundamental mismatch between a company’s obligations and its overall financial resources.

    Key Characteristics:

    • Indicates that the entity is technically insolvent and unable to repay its debts even if all assets are liquidated.

    • Unlike cash flow insolvency, this condition is structural and often requires extensive restructuring or bankruptcy proceedings.

    Causes:

    • Persistent losses that erode retained earnings and equity over time.

    • Excessive borrowing relative to the company’s capacity to generate revenue.

    • Depreciation in the value of long-term assets, particularly in industries reliant on physical or specialized assets (e.g., real estate or heavy machinery).

    • External shocks such as regulatory changes, market collapses, or catastrophic events.

    Causes of Insolvency

    Insolvency arises from a combination of factors that undermine a company’s ability to meet its financial obligations over the long term. Below are the primary causes of insolvency:

    • Prolonged Financial Losses – Sustained operational losses over time erode a company’s equity and reduce its ability to generate profits. Businesses operating in highly competitive or declining markets may struggle to maintain profitability, leading to negative net income and a weakened financial position.

    • Excessive Leverage – Over-reliance on borrowed funds (debt) can strain a company’s financial stability. High leverage increases fixed costs in the form of interest payments, reducing financial flexibility. If the company’s revenues are insufficient to cover these obligations, insolvency becomes inevitable.

    • Poor Financial Management – Inadequate budgeting, weak internal controls, or mismanagement of resources can lead to insolvency. Companies that fail to monitor expenses, optimize revenue streams, or manage working capital effectively are at higher risk of insolvency.

    • Decline in Market Demand – Shifts in consumer preferences, technological advancements, or market disruptions can lead to reduced demand for a company’s products or services. Persistent declines in revenue can deplete reserves and make it difficult to cover fixed costs and debt obligations.

    • Adverse Economic Conditions – Broader economic downturns, recessions, or geopolitical uncertainties can reduce consumer spending and disrupt supply chains. These factors often lead to declining revenues and increased costs, pushing businesses into insolvency.

    • Legal and Regulatory Challenges – Ongoing legal disputes, fines, or changes in regulatory requirements can drain financial resources and disrupt operations. Companies facing substantial penalties or compliance costs may become insolvent if they lack sufficient reserves.

    • Poor Capital Structure – An imbalance in the capital structure, such as an over-reliance on short-term debt for funding long-term projects, can increase financial risk. Companies that fail to optimize their mix of debt and equity may struggle with rising interest payments and reduced operational flexibility.

    • Unanticipated Large Expenses – Unexpected financial burdens, such as lawsuits, product recalls, or natural disasters, can quickly deplete a company’s reserves and lead to insolvency.

    • Inefficient Business Model -Companies with outdated or inefficient business models may fail to generate sufficient returns to sustain operations, especially in competitive or innovative markets.

    Consequences of Insolvency

    Insolvency has far-reaching implications for businesses, creditors, employees, and other stakeholders. Below are the primary consequences of insolvency:

    • Bankruptcy Filings -Insolvency often leads to legal proceedings, with the most common being bankruptcy filings. Depending on the jurisdiction, companies may choose between different bankruptcy types:

      • Chapter 7 (Liquidation): The company ceases operations, and its assets are sold to pay creditors. This is common for businesses that have no viable path to recovery.

      • Chapter 11 (Reorganization): The company continues operations while restructuring its debts and obligations under court supervision. This allows businesses to renegotiate terms with creditors and emerge as a leaner, more viable entity.

    • Restructuring or Liquidation of Assets -Companies may undergo significant restructuring to restore financial stability. This can include renegotiating debt terms, cutting operational costs, or divesting non-core assets.

      • Restructuring: Focuses on reorganizing the company’s financial obligations to regain solvency while maintaining operations.

      • Liquidation: Involves selling off assets to repay creditors, often signalling the end of business operations.

    • Loss of Shareholder Value – Shareholders are often the last to be compensated in insolvency scenarios, and in many cases, they lose their entire investment. The market value of the company’s shares typically plummets during insolvency proceedings, reflecting the financial instability.

    • Reputational Damage – Insolvency erodes trust among stakeholders, including creditors, investors, customers, and suppliers. This damage to reputation can make it challenging for a company to secure future financing, partnerships, or business opportunities even after recovery.

    • Employee Layoffs and Salary Defaults – Insolvent companies often reduce their workforce to cut costs. Employees may face delayed salaries, loss of benefits, or sudden termination. This can create significant disruptions for the workforce and impact morale and productivity.

    • Legal and Regulatory Implications – Insolvency proceedings often involve legal scrutiny, with courts, regulatory bodies, and creditors closely examining the company’s financial activities. Non-compliance or mismanagement that contributed to insolvency can lead to fines, penalties, or criminal charges against executives.

    • Asset Seizure by Creditors – Creditors may take legal action to recover debts, resulting in the seizure or foreclosure of the company’s assets. Secured creditors typically have priority in claiming collateral, while unsecured creditors may receive partial or no repayment.

    • Impact on Creditors – Creditors may face financial losses due to unpaid debts. In bankruptcy, the repayment hierarchy often prioritizes secured creditors, leaving unsecured creditors with minimal recovery. This can lead to a ripple effect on creditors’ financial health.

    • Industry and Market Implications – Insolvency of a major company can disrupt the industry or supply chain it operates in. For example, the bankruptcy of a large supplier may affect dependent companies downstream, creating broader economic consequences.

    • Opportunities for Acquisition or Takeover – Insolvency often leads to opportunities for competitors or investors to acquire assets or the entire company at discounted valuations. This can result in consolidation within the industry.

    Preventing Insolvency

    Proactively managing financial health is the cornerstone of preventing insolvency. Businesses must employ strategic measures to anticipate potential risks, optimize resources, and build resilience against economic uncertainties.

    Importance of Financial Forecasting and Stress Testing

    Financial Forecasting: Regular financial forecasting allows businesses to predict future cash flows, revenue, and expenses. Accurate forecasts enable companies to identify potential shortfalls well in advance and implement corrective measures.

    Key Actions:

    • Develop rolling forecasts that adjust for real-time changes.

    • Incorporate multiple scenarios to evaluate outcomes under varying conditions.

    Example: A company anticipating seasonal revenue dips can arrange short-term financing or delay non-essential expenses.

    Stress Testing: Stress testing simulates adverse economic scenarios—such as a market downturn, supply chain disruption, or rising interest rates—to evaluate the company’s ability to remain solvent under pressure.

    Key Actions:

    • Assess liquidity under stress scenarios to determine if obligations can be met.

    • Use outcomes to refine contingency plans.

    Example: A manufacturer testing the impact of a 20% raw material cost increase might discover a need for improved supplier contracts.

    Effective Debt Management Strategies

    Debt Structuring: Avoid excessive reliance on short-term debt, which can strain cash flows. Use a balanced mix of short-term and long-term debt to align with business cycles and asset lifespans.

    Key Actions:

    • Renegotiate unfavourable loan terms.

    • Use fixed-rate loans during periods of volatile interest rates.

    Debt Servicing Discipline:

    Prioritize timely repayment of interest and principal to avoid compounding liabilities.

    Example: Automating debt payments ensures consistency and avoids penalties.

    Monitoring Debt Ratios:

    Regularly analyse debt-to-equity and interest coverage ratios to ensure sustainable leverage.

    Key Actions:

    • Reduce non-essential borrowing.

    • Use retained earnings or equity to finance expansion instead of debt.

    Building Strong Liquidity Buffers

    Liquidity Reserves:

    Maintain cash reserves or liquid assets to manage unexpected shortfalls. A robust liquidity buffer acts as a financial safety net during crises.

    Key Actions:

    • Allocate a percentage of revenue to a contingency fund.

    • Invest in low-risk, short-term instruments like treasury bills.

    Credit Line Management:

    Establish pre-approved credit facilities for emergency use.

    Example: A revolving credit line ensures access to immediate funding without lengthy approval processes.

    Working Capital Optimization:

    Efficiently manage receivables, payables, and inventory to free up cash.

    Example: Implementing stricter credit terms for customers and negotiating extended payment terms with suppliers.

    Why Should I Be Interested in This Post?

    Insolvency is not just a business concern; it’s a fundamental challenge that can impact investors, employees, and entire economies. This post equips you with a comprehensive understanding of how to anticipate, prevent, and address insolvency by exploring its causes, indicators, and solutions. Whether you’re a student aspiring to master corporate finance, an entrepreneur striving to protect your business, or a professional managing financial risks, the insights in this article empower you to navigate financial complexities with confidence. By understanding solvency dynamics and adopting proactive strategies, you can make informed decisions, safeguard financial stability, and capitalize on opportunities, even in the face of adversity.

    Related posts on the SimTrade blog

       ▶ Snehasish CHINARA Illiquidity, Liquidity and Illiquidity in the Corporate World

       ▶ Snehasish CHINARA Illiquidity, Solvency & Insolvency : A Link to Bankruptcy Procedures

       ▶ Snehasish CHINARA Chapter 7 vs Chapter 11 Bankruptcies: Insights on the Distinction between Liquidations & Reorganisations

       ▶ Snehasish CHINARA Chapter 7 Bankruptcies: A Strategic Insight on Liquidations

       ▶ Snehasish CHINARA Chapter 11 Bankruptcies: A Strategic Insight on Reorganisations

       ▶ Akshit GUPTA The bankruptcy of Lehman Brothers (2008)

       ▶ Akshit GUPTA The bankruptcy of the Barings Bank (1996)

       ▶ Anant JAIN Understanding Debt Ratio & Its Impact On Company Valuation

    Useful resources

    US Courts Data – Bankruptcy

    S&P Global – Bankruptcy Stats

    Statista – Bankruptcy data

    About the author

    The article was written in January 2025 by Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2025).

    Liquidity and Illiquidity in the Corporate World

     Snehasish CHINARA In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2025) delves into liquidity and illiquidity, key concepts in the corporate world.

    Introduction to Liquidity and Illiquidity

    Liquidity and Illiquidity Definitions

    Liquidity is an important economic concept that can be applied to individuals, companies and financial institutions. In this article, we deal with liquidity at the firm level, which involves the liquidity of the assets and the due date of the liabilities.

    In a corporate context, liquidity refers to the ability and capacity of accompany to meet its short-term financial obligations using its available cash or easily convertible assets. Short-term financial obligations refer to the payment of the salary to employees, the invoices to providers, the interests of loans and bonds to the creditors, the taxes to the state, etc. Current assets refer to cash, marketable securities, accounts receivable, and inventories. They are categorized as liquid assets due to their relative accessibility and low conversion time.

    To assess liquidity, we need to compare the liquidity of assets and the due date of liabilities. In practice, assets and liabilities can be found with their amount in the balance sheet of the firm. For an asset, liquidity is the ability to quickly convert the asset into cash at its fair market value (with relatively small market impact). For a liability, the due date is key.

    Illiquidity refers to the inability of a company to convert assets into cash quickly enough to meet short-term financial obligations as they come due. This condition arises from a mismatch in the timing of cash inflows and outflows (illiquidity or a fundamental deficiency in overall financial health (insolvency). For instance, a firm might hold substantial non-liquid assets (e.g., accounts receivable or inventory) that are valuable but not immediately accessible for use in settling debts. The states of liquidity and illiquidity are generally viewed as a short-term liquidity risk and is often addressed through measures such as enhanced cash flow management, securing bridge financing, or leveraging credit facilities.

    Causes of Illiquidity

    The following are few causes of illiquidity:

    • Poor Cash Management – Inefficient management of cash flows, such as misaligning income and expenses, is a primary cause of illiquidity. Businesses that fail to maintain adequate liquidity reserves or do not accurately forecast future cash needs may face severe short-term financial strain. For instance, a company might overestimate receivables collections or underestimate operational expenses, leading to insufficient funds for immediate obligations.

    • External Shocks:

      • Market Downturns: Economic recessions, sudden market volatility, or a decline in demand for products/services can significantly reduce cash inflows, creating liquidity stress.

      • Seasonal Variations: Businesses with highly seasonal revenue streams, such as retail or tourism, may experience cash shortages during off-peak periods when income generation is low but fixed costs remain constant.

      • Supply Chain Disruptions- Unexpected events like raw material shortages, logistical delays, or geopolitical risks can disrupt production cycles, leading to revenue delays and payment bottlenecks.

    • Over-Leverage – Excessive reliance on debt without adequate planning for repayments can strain liquidity. Companies that overextend themselves with short-term borrowing may face difficulties rolling over or refinancing debt, especially in tight credit markets.

    • Rapid Expansion- Aggressive growth strategies, such as entering new markets or launching new products, can deplete cash reserves if expenses outpace revenue generation. For example, increased capital expenditures or marketing costs may lead to liquidity shortages during the early stages of expansion.

    • Asset Illiquidity- Holding a significant portion of assets in non-liquid forms (e.g., real estate, long-term investments) reduces the ability to generate quick cash. While these assets contribute to the overall balance sheet value, their inability to be converted into liquid funds on short notice can exacerbate illiquidity during crises.

    • Contractual Obligations- Fixed payment schedules for rent, salaries, or interest on loans can pressure liquidity when cash inflows do not align with payment deadlines. Even profitable businesses can face illiquidity if contractual commitments are poorly synchronized with revenue cycles.

    • Credit Constraints – Difficulty accessing credit markets due to poor credit ratings, higher interest rates, or restrictive borrowing conditions can leave firms unable to secure short-term financing. Companies with a history of missed payments may struggle to find lenders willing to provide liquidity support.

    Measuring Liquidity

    Key Liquidity Metrics

    Liquidity metrics provide a structured way to assess the ability of individuals, companies, or financial systems to meet short-term obligations. These metrics are foundational for understanding a financial entity’s operational efficiency and financial health.

    Current Ratio

    • Purpose: Measures a company’s ability to cover its short-term obligations with its short-term assets.

    • Interpretation: A ratio above 1 indicates that a company has more current assets than current liabilities, signalling good liquidity. However, an excessively high ratio might indicate inefficiency in utilizing resources.

    Example – Consider two (non- financial) companies A & B

    Company A:

    • Current Assets = €200,000

    • Inventory = €50,000

    • Current Liabilities = €100,000

    Quick Ratio (Company A) = (200,000 – 50,000)/100,000 = 1.5

    Company B:

    • Current Assets = €80,000

    • Inventory = €30,000

    • Current Liabilities = €100,000

    Quick Ratio (Company B) = (80,000-30,000)/100,000 = 0.5

    Here, Company A maintains sufficient liquidity even after excluding inventory, while Company B faces liquidity concerns.

    Cash Conversion Cycle (CCC)

    • Purpose: Evaluates the efficiency of a company in managing its working capital by measuring the time it takes to convert investments in inventory and receivables into cash.

    • Interpretation: A shorter cycle indicates faster liquidity, suggesting effective operational management.

    Example – Consider two (non- financial) companies A & B

    Company A:

    • DIO = 40 days

    • DSO = 30 days

    • DPO = 45 days

    CCC(A)=40+30−45=25 Days

    Company B:

    • DIO = 80 days

    • DSO = 50 days

    • DPO = 40 days

    CCC (B)=80+50−40=90 Days

    Company A has a shorter CCC, indicating quicker cash turnover, while Company B takes longer to convert inventory and receivables into cash, leading to potential liquidity constraints.

    Quick Ratio (Acid-Test Ratio)

    • Purpose: Excludes inventory from current assets to provide a stricter measure of liquidity, as inventory may not be easily converted to cash.

    • Interpretation: A ratio above 1 typically reflects strong liquidity, especially for companies in industries where inventory turnover is slow.

    Example – Consider two (non- financial) companies A & B

    Company A:

    • Current Assets = €200,000

    • Inventory = €50,000

    • Current Liabilities = €100,000

    Quick Ratio (Company A) = (200,000 – 50,000)/100,000 = 1.5

    Company B:

    • Current Assets = €80,000

    • Inventory = €30,000

    • Current Liabilities = €100,000

    Quick Ratio (Company B) = (80,000-30,000)/100,000 = 0.5

    Here, Company A maintains sufficient liquidity even after excluding inventory, while Company B faces liquidity concerns.

    Funding Liquidity

    Funding liquidity is the ability of firms, financial institutions, or individuals to meet short-term obligations as they come due, using available cash, liquid assets, or borrowing capacity. It reflects the financial health and cash management practices of an entity.

    Key Characteristics:

    • Access to Cash: Availability of cash or near-cash assets.

    • Borrowing Capacity: Ability to raise funds through credit lines or issuing debt.

    • Short-Term Solvency: Ensuring that obligations such as payroll, supplier payments, and loan repayments are met on time.

    Examples:

    • A company maintaining a cash reserve or a revolving credit line for emergencies.

    • Banks relying on interbank lending markets for overnight funding.

    Consequences of Illiquidity

    Illiquidity can have a cascading impact on a business’s financial health and operational stability. The impact ranges from borrowing difficulties to bankruptcy. Below are the key consequences of illiquidity:

    • Missed Payments to Creditors – Companies facing illiquidity may struggle to meet immediate financial obligations such as loan repayments, supplier invoices, or tax liabilities. This can damage relationships with creditors and suppliers, leading to stricter payment terms, higher interest rates, or the refusal of future credit. Missed payments may also result in legal penalties or lawsuits, further exacerbating financial difficulties.

    • Short-Term Borrowing – To address cash flow gaps, businesses often resort to short-term borrowing, such as credit lines or bridge loans. While this provides immediate relief, repeated reliance on short-term financing can increase interest expenses and leverage, making the company more vulnerable to future liquidity crises. High debt levels may also negatively impact credit ratings, limiting access to affordable financing.

    • Asset Liquidation – Companies may be forced to sell non-core or underperforming assets to generate quick cash. While this can temporarily alleviate liquidity pressure, it can weaken the firm’s long-term strategic position if valuable or income-generating assets are sold. Additionally, asset liquidation in distress scenarios often leads to unfavourable valuations, further diminishing the firm’s financial standing.

    • Operational Disruptions – A lack of liquidity can hinder day-to-day operations, such as the inability to purchase raw materials, pay employees, or fund marketing initiatives. These disruptions can result in reduced productivity, loss of market share, and damage to the company’s reputation among customers and stakeholders.

    • Increased Cost of Capital – Persistent illiquidity may lead to higher borrowing costs as creditors perceive the company as a higher-risk borrower. This increased cost of capital can strain cash flows further and limit the company’s ability to invest in growth opportunities.

    • Employee Layoffs or Salary Delays – In severe cases, companies may delay salaries or initiate workforce reductions to conserve cash. This can lead to lower employee morale, higher attrition rates, and loss of critical talent, affecting the firm’s long-term capabilities and performance.

    • Decline in Market Confidence – Illiquidity signals financial distress to investors, customers, and suppliers. A decline in market confidence can lead to reduced stock prices, difficulty in securing contracts, and a potential withdrawal of customer deposits (in the case of financial institutions).

    • Escalation to Insolvency – If illiquidity persists and the company cannot stabilize cash flows, it may transition into insolvency, where liabilities exceed assets. This often leads to bankruptcy proceedings, such as liquidation (Chapter 7) or reorganisation (Chapter 11).

    • Regulatory and Legal Penalties – Failure to meet statutory obligations, such as tax payments or compliance filings, can result in regulatory fines or legal action. For financial institutions, illiquidity may lead to intervention by regulators or central banks.

    • Bankruptcy – If the liquidity crisis persists, the company may be forced to restructure its debts, sell assets at distressed prices, or seek emergency funding. In extreme cases, prolonged illiquidity can result in insolvency, pushing the firm toward bankruptcy proceedings, such as Chapter 7 liquidation (where assets are sold to repay creditors) or Chapter 11 reorganization(where the company restructures to regain financial stability).

    Liquidity Management for Companies

    Liquidity management is a cornerstone of a company’s financial health, ensuring that it can meet its short-term obligations and operate smoothly without disruptions. Effective liquidity management safeguards against financial distress, supports growth, and enhances the company’s ability to respond to market opportunities or challenges.

    Tools for Liquidity Management

    1.Cash Flow Forecasting:

    • Purpose: Predicts cash inflows and outflows over a specific period, allowing companies to anticipate liquidity needs.

    • Implementation: Regularly updating forecasts based on operational activities, seasonal trends, and external market factors.

    • Benefits: Helps identify potential shortfalls or surpluses and plan financing or investment activities accordingly.

    2.Credit Lines:

    • Purpose: Pre-approved borrowing arrangements with banks provide immediate access to funds when needed.

    • Implementation: Companies negotiate revolving credit facilities with financial institutions.

    • Benefits: Offers flexibility to address liquidity shortfalls without lengthy approval processes.

    3.Liquidity Buffers:

    • Purpose: Reserve cash or easily liquidated assets set aside to manage unforeseen circumstances.

    • Implementation: Maintaining a percentage of revenue or working capital in liquid form.

    • Benefits: Acts as an emergency fund to meet unexpected expenses or capitalize on opportunities.

    4.Working Capital Optimization:

    • Purpose: Efficiently managing current assets and liabilities to improve liquidity.

    • Implementation:

      • Reducing inventory levels without compromising production.

      • Negotiating longer payment terms with suppliers.

      • Accelerating accounts receivable collection.

    • Benefits: Frees up cash for other uses without requiring additional financing.

    5.Treasury Management Systems (TMS):

    • Purpose: Automates liquidity tracking and management processes.

    • Implementation: Deploying software to consolidate cash positions, manage risks, and optimize cash usage.

    • Benefits: Enhances real-time visibility into cash flows and simplifies decision-making.

    Building Strong Liquidity Buffers

    A well-structured liquidity buffer is essential for corporate firms to withstand financial shocks, economic downturns, and unexpected cash flow disruptions. Establishing and maintaining sufficient liquidity ensures that companies can meet their short-term obligations, maintain investor confidence, and continue operations smoothly during periods of uncertainty. Below are key strategies that firms can adopt to strengthen their liquidity buffers.

    Liquidity Reserves:

    Liquidity reserves refer to the cash and readily accessible liquid assets that a company maintains to address unforeseen financial needs. These reserves act as a financial safety net, ensuring that a firm can continue operations even during economic downturns, market disruptions, or revenue shortfalls.

    Maintain cash reserves or liquid assets to manage unexpected shortfalls. A robust liquidity buffer acts as a financial safety net during crises.

    Key Actions:

    • Allocate a percentage of revenue to a contingency fund.

    • Invest in low-risk, short-term instruments like treasury bills.

    • Regularly Review Liquidity Needs

    • Diversify Cash Holdings Across Financial Institutions

    Credit Line Management:

    Beyond maintaining cash reserves, companies should have access to credit facilities that provide immediate funding when needed. A well-managed credit line acts as an additional liquidity buffer and prevents financial distress when operational cash flows are temporarily constrained.

    Example: A revolving credit line ensures access to immediate funding without lengthy approval processes.

    Working Capital Optimization:

    Working capital represents a company’s ability to manage its short-term assets and liabilities efficiently. Optimizing accounts receivable, accounts payable, and inventory can significantly enhance liquidity without the need for external borrowing or additional capital injections.

    Example: Implementing stricter credit terms for customers and negotiating extended payment terms with suppliers.

    Why Should I Be Interested in This Post?

    Understanding liquidity and its management is crucial not just for financial professionals but for anyone navigating the modern economic landscape. Whether you are an investor assessing asset portfolios, a corporate leader ensuring operational stability, or a student preparing for a career in finance, liquidity forms the foundation of informed decision-making. This post provides a comprehensive guide to the causes, consequences, and tools of liquidity management, equipping you with the knowledge to evaluate financial health, mitigate risks, and capitalize on opportunities. In a world where liquidity—or the lack thereof—can mean the difference between success and failure, mastering this concept empowers you to make smarter financial decisions, stay resilient during crises, and thrive in dynamic markets.

    Related posts on the SimTrade blog

       ▶ Snehasish CHINARA Illiquidity, Solvency & Insolvency : A Link to Bankruptcy Procedures

       ▶ Snehasish CHINARA Chapter 7 vs Chapter 11 Bankruptcies: Insights on the Distinction between Liquidations & Reorganisations

       ▶ Snehasish CHINARA Chapter 7 Bankruptcies: A Strategic Insight on Liquidations

       ▶ Snehasish CHINARA Chapter 11 Bankruptcies: A Strategic Insight on Reorganisations

       ▶ Akshit GUPTA The bankruptcy of Lehman Brothers (2008)

       ▶ Akshit GUPTA The bankruptcy of the Barings Bank (1996)

       ▶ Anant JAIN Understanding Debt Ratio & Its Impact On Company Valuation

    Useful resources

    US Courts Data – Bankruptcy

    S&P Global – Bankruptcy Stats

    Statista – Bankruptcy data

    About the author

    The article was written in January 2025 by Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2025).

    My First Professional full-time job as a Loan Closer at Bank of America

    Anant POLIS

    In this article, Agnes POLIS (ESSEC Business School, Mastère Specialisé Direction Financière et Contrôle (MS DFC), 2024-2026) shares her professional experience, having worked as a Loan Closer at Bank of America, overseeing Collateralized Debt Obligation (CDO) transactions within American and British portfolios valued at over 500 million USD.

    About Bank of America

    Bank of America was originally founded in 1904 by Amadeo Giannini in San Francisco as the Bank of Italy, created to serve immigrants overlooked by other banks. It officially became Bank of America in 1930 and has since grown through major mergers, including its acquisition of Merrill Lynch in 2009. Today, the company operates in all 50 U.S. states and over 35 countries, offering services in consumer banking, corporate banking, wealth management, and investment services. Its strategy centers on responsible growth, digital transformation, and deepening client relationships while maintaining strong risk management practices. Bank of America’s mission is to improve financial lives through the power of every connection it makes with its clients, communities, and employees. As of 2024, it serves over 69 million clients worldwide and manages assets surpassing $3.2 trillion.

    Logo of Bank of America
    Logo of  Bank of America
    Source: the company.

    My work

    Agnes worked for Corporate and Investment Banking division where the Loan Closing department manages the operational, legal, and financial processes associated with syndicated loans and structured finance products, including CDOs.

    Upon completion of the training program, Agnes assumed responsibility for a portfolio of Collateralized Debt Obligation transactions valued at over 500 million USD. These transactions primarily involved American and British corporate borrowers. A Loan Closer in the Collateralized Debt Obligation (CDO) market, especially around 2007 (before the financial crisis hit), had a very specific but crucial operational and legal role within structured finance desks, investment banks, and loan syndication units.

    Collaterized Debt Obligation market
    Collaterized Debt Obligation market
    Source: Allied Market Search

    Her core responsibilities included: transaction management & documentation, coordination with internal and external stakeholders, funding & settlement oversight, recordkeeping & compliance, and fee and payment management.

    Transaction Management & Documentation

    • Coordinate the closing process for syndicated loans that would be bundled into CDO portfolios.
    • Review and manage documentation for accuracy and completeness, including loan agreements, credit agreements, security agreements, intercreditor agreements, and other ancillary documents.
    • Ensure all closing conditions precedent (CPs) and legal requirements were satisfied prior to disbursement of funds and inclusion in a CDO structure.

    Coordination with Internal and External Stakeholders

    • Act as a liaison between deal teams, syndicate desks, investors, legal counsel, custodians, trustees, and rating agencies.
    • Coordinate closing calls and circulate closing memos summarizing the deal structure, participant roles, and transaction details.

    Funding & Settlement Oversight

    • Manage the transfer of ownership documentation and ensure timely settlement with custodians or agents.
    • Track and confirm receipt of wire instructions, fee payments, and disbursement of funds.

    Recordkeeping & Compliance

    • Maintain detailed records of closing checklists, loan documents, approvals, waivers, and amendments.
    • Ensure compliance with regulatory guidelines and internal credit risk policies.
    • Flag any discrepancies, missing documentation, or legal exceptions to management.

    Fee and Payment Management

    • Confirm payment of closing fees, commitment fees, arrangement fees, and legal fees associated with each transaction.
    • Manage post-closing adjustments and corrections if necessary.

    Required skills and knowledge

    This position required a high level of technical precision, attention to detail, and effective coordination with stakeholders located in multiple international offices.

    The role of a Loan Closer in the CDO market requires a combination of technical knowledge, legal expertise, and strong organizational skills. Below are the key skills and knowledge areas that were important in 2007:

    Technical Skills

    • Understanding of Structured Finance: Knowledge of CDOs, CLOs, and the broader structured credit market, including the mechanics of asset-backed securities.
    • Financial Analysis: Ability to assess loan portfolios, evaluate risk, and understand credit ratings and eligibility criteria for collateral.
    • Knowledge of Loan Syndication: Familiarity with syndicated loan markets, participants, loan documentation, and the process of loan syndication.
    • Excel and Financial Modeling: Proficiency in Excel for tracking loan data, financial calculations, and ensuring proper documentation management.
    • Familiarity with Loan Documentation: Deep understanding of key legal documents, such as loan agreements, credit agreements, intercreditor agreements, and collateral agreements.

    Desirable Soft Skills

    • Effective Communication: Ability to communicate complex financial and legal information to a range of stakeholders, including senior managers, legal teams, investors, and rating agencies.
    • Attention to Detail: Thorough review of all documentation and loan conditions to ensure accuracy, consistency, and compliance with all requirements.
    • Strong Organizational Skills: Ability to keep track of numerous documents, deadlines, approvals, and closing conditions in a fast-paced, high-pressure environment.
    • Problem-Solving Abilities: Ability to identify discrepancies or issues with documentation or compliance and proactively resolve them to ensure smooth transaction closures.

    What I learned

    The primary outcomes of this role included:

    • Developing a comprehensive understanding of CDO structures and associated operational processes.
    • Gaining experience in managing cross-border financial transactions within a regulated environment.
    • Acquiring practical skills in transaction lifecycle management, documentation review, and risk control procedures.
    • Building competencies in stakeholder coordination within geographically dispersed, multicultural teams.

    Financial concepts related to my job

    I present below three financial concepts related to my work:

    Collateralized Debt Obligation (CDO) Structures

    A CDO is a financial product that combines different types of debt (like loans) into one package. It’s then divided into different levels (or “tranches”) based on risk. Some parts of the CDO offer higher risk and higher returns, while others offer lower risk and returns. The Loan Closer ensures the loans are eligible to be included in these CDOs and that all paperwork is in order.

    Syndicated Loans

    These are loans provided by a group of banks or lenders, rather than just one. The Loan Closer’s role is to make sure the loans are properly documented and structured before they are bundled into CDOs (Collateralized Debt Obligations). These loans are used in CDOs because they are easier to manage and provide diverse investment options.

    Loan Documentation and Covenants

    Loans come with legal agreements that outline the terms and conditions, including rules called covenants that limit what the borrower can or can’t do. These covenants are important for managing risk, especially in CDOs. The Loan Closer ensures that all the legal documents are correct and that the covenants are clear and in place to protect the lenders.

    Related posts on the SimTrade blog

       ▶ My Internship Experience as a Corporate Finance Analyst in the 2IF Department of Inter Invest Group

       ▶ Compliance et régulation dans le secteur financier : focus sur les prêts de titres et les dérivés OTC

    Useful resources

    Business Research Insights Collateralized Debt Obligation Market Size, Share, Growth, and Industry Analysis by Type (Collateralized loan obligations (CLOs), Collateralized bond obligations (CBOs), Collateralized synthetic obligations (CSOs), and Structured finance CDOs (SFCDOs)) By Application (Asset Management Company, Fund Company, and Other), Regional Insights and Forecast From 2025 To 2033

    Anna Katherine Barnett-Hart The Story of the CDO Market Meltdown: An Empirical Analysis Harvard Kennedy School.

    About the author

    The article was written in May 2025 by Agnes POLIS (ESSEC Business School, Mastère Specialisé Direction Financière et Contrôle (MS DFC), 2024-2026).

    Retained Earnings

    Nithisha CHALLA

    In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) delves into Retained Earnings, providing a comprehensive analysis on type of retained earnings, explaining its theoretical foundations, discussing the other financial metrics compared to it, its valuation and limitations.

    Introduction

    Retained Earnings (RE) represent the portion of a company’s net income that is reinvested in the business rather than distributed to shareholders as dividends. This financial metric is a crucial indicator of a firm’s long-term growth potential, profitability, and financial stability. For students pursuing finance, understanding retained earnings is essential for evaluating corporate financial health, capital structure decisions, and strategic reinvestment policies.

    Unlike dividends, which provide immediate shareholder returns, retained earnings are used for reinvestments such as research and development (R&D), acquisitions, debt reduction, and business expansion. The strategic management of retained earnings plays a vital role in a company’s value creation, influencing stock price appreciation and long-term shareholder wealth.

    Definition and Formula

    Retained earnings are calculated as follows:

    Formula of Retained Earnings
     Formula of Retained Earnings

    where:

    • Beginning RE = Retained earnings from the previous period.
    • Net Income = Profits earned during the period.
    • Dividends Paid = Cash or stock dividends distributed to shareholders.

    A positive retained earnings balance indicates profitability and reinvestment potential, whereas negative retained earnings (also known as an accumulated deficit) suggest financial distress or excessive dividend payouts.

    Theoretical Foundations of Retained Earnings

    Retained earnings have been widely analyzed in financial theory, particularly in relation to dividends, investor behavior, and market efficiency.

    Dividend Irrelevance Theory (Miller & Modigliani, 1961)

    According to Miller and Modigliani’s capital structure theory, in a perfect market, dividend policy and retained earnings allocation do not affect firm value. However, in reality, taxes, transaction costs, and capital constraints make retained earnings a critical internal financing source.

    Pecking Order Theory

    According to Oxford Research Encyclopedias, this theory suggests that firms prefer internal financing (retained earnings) over external financing (debt or equity issuance) due to lower costs and reduced information asymmetry. Companies with strong retained earnings can fund expansion without diluting ownership or increasing leverage.

    Growth Theory (Gordon Growth Model)

    The Gordon Growth Model highlights the trade-off between paying dividends and reinvesting earnings. Higher retained earnings lead to greater reinvestment, potentially boosting future earnings and stock price appreciation.

    Importance of Retained Earnings in Finance

    Retained Earnings is vital in Finance to learn about a company’s growth, expansion, capital investments, and debt reductions.

    • Capital Investment and Expansion – Retained earnings finance business growth, acquisitions, and infrastructure improvements.
    • Debt Reduction – Companies use retained earnings to pay down debt, reducing interest costs and financial risk.
    • Shareholder Wealth Creation – Reinvested earnings contribute to higher stock valuations, benefiting long-term investors.
    • Liquidity and Financial Stability – Firms with substantial retained earnings have greater financial flexibility in economic downturns.
    • Dividend Policy Decisions – Retained earnings influence dividend payout ratios and corporate distribution policies.

    Retained Earnings vs. Other Financial Metrics

    There are many return metrics apart from Retained earnings, such as dividends, Net income, cash reserves, and shareholder equity as follows below:

    Retained Earnings vs Other metrics
     Retained Earnings vs Other metrics

    While these metrics provide valuable insights into a company’s financial health, retained earnings remain unique in their ability to capture the total accumulated profits and give an idea for reinvestments.

    When it comes to net income, retained earnings include accumulated profits and not just the current income; it excludes payout dividends, and can be reinvested but not obtained as cash. Retained earnings are a component of shareholder equity.

    Factors Influencing Retained Earnings

    Several factors influence retained earnings:

    • Profitability – Higher net income leads to higher retained earnings.
    • Dividend Policy – Companies paying higher dividends retain less for reinvestment.
    • Capital Expenditure Needs – Firms requiring heavy reinvestment often retain more earnings.
    • Industry Trends – High-growth sectors (e.g., tech) tend to reinvest more, while mature industries may prioritize dividend payouts.
    • Economic Conditions – In downturns, firms may retain more earnings to maintain liquidity.

    Retained Earnings in Corporate Valuation

    Retained earnings play a vital role in corporate valuation models:

    Discounted Cash Flow (DCF) Analysis

    Retained earnings affect future cash flow projections and reinvestment rates.

    Return on Retained Earnings (RORE)

    Measures how effectively retained earnings generate additional profits.

    Formula of Return on Retained Earnings (RORE)
    Formula of Return on Retained Earnings (RORE)

    Earnings Per Share (EPS) Growth

    Higher retained earnings contribute to EPS expansion, driving stock value.

    Case Studies in Retained Earnings Utilization

    • Apple Inc. (AAPL) – Apple has historically retained earnings for R&D and acquisitions, fueling innovation and stock price appreciation.
    • Amazon (AMZN) – Amazon reinvests nearly all its earnings into business expansion, prioritizing long-term growth over dividends.
    • General Motors (GM) – During financial crises, GM retained earnings to strengthen its balance sheet, ensuring long-term survival.

    Challenges and Limitations of Retained Earnings

    • Underutilization Risks – Excessive retained earnings without reinvestment plans may lead to inefficient capital allocation.
    • Shareholder Expectations – Investors seeking dividends may view high retained earnings as a lack of returns.
    • Inflation and Depreciation – Inflation can erode the real value of retained earnings over time.

    Conclusion

    Retained earnings serve as a powerful financial tool, influencing corporate growth, shareholder returns, and financial stability. Understanding their impact on valuation, reinvestment strategies, and dividend policies is essential for finance professionals aiming to make data-driven investment and corporate finance decisions. By mastering retained earnings analysis, finance students can enhance their analytical skills and prepare for careers in investment banking, corporate finance, and asset management.

    Why should I be interested in this post?

    For finance students, understanding retained earnings is crucial as it directly impacts financial modeling and company valuation. Mastery of financial statement analysis, including retained earnings, is essential for roles in asset management, equity research, and financial consulting.

    Related posts on the SimTrade blog

       ▶ Shruti CHAND Shareholder’s Equity

       ▶ Bijal GANDHI Income Statement

       ▶ Raphaël ROERO DE CORTANZE Dividend policy

    Useful resources

    Academic resources

    Myers, S. C., & Majluf, N. S. (1984) Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221.

    Other resources

    Bajaj Finserve What is the meaning of retained earnings?

    About the author

    The article was written in May 2025 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

    Dividends

    Nithisha CHALLA

    In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) delves into Dividends, providing a comprehensive analysis on type of dividends, explaining its theoretical foundations, discussing the policy strategies, its valuation and limitations.

    Introduction

    Dividends are a fundamental component of shareholder returns, representing a direct distribution of a company’s profits to its investors. They play a crucial role in corporate finance, investment decision-making, and equity valuation. Dividends not only signal financial health but also serve as a means of returning excess capital to shareholders. For finance students, understanding the theoretical foundations, types, determinants, and impact of dividends is essential for analyzing investment opportunities and corporate strategies.

    Definition and Types of Dividends

    A dividend is a payment made by a corporation to its shareholders, typically derived from net profits. Companies distribute dividends as a reward to shareholders for their investment, either in cash or additional shares.

    There are different types of dividends:

    • Cash Dividends – The most common form, where companies pay shareholders a fixed amount per share.
    • Stock Dividends – Companies issue additional shares instead of cash, increasing the number of outstanding shares while retaining cash reserves.
    • Property Dividends – Non-cash distributions, such as physical assets or securities of a subsidiary.
    • Scrip Dividends – A promissory note issued by a company, committing to pay dividends at a later date.
    • Liquidating Dividends – Distributed when a company is winding up operations, returning capital to investors beyond retained earnings.

    Theoretical Foundations of Dividends

    Dividends have been widely analyzed in financial theory, particularly in relation to firm value, investor behavior, and market efficiency.

    Dividend Irrelevance Theory (Miller & Modigliani, 1961)

    Miller and Modigliani argue that in a perfect capital market, dividend policy is irrelevant to a company’s valuation. The theory rests on several idealized assumptions. Miller and Modigliani asserted that in a perfect capital market (no taxes, transaction costs, or information asymmetry), a company’s dividend policy does not affect its market value or cost of capital. According to this theory, investors are indifferent between dividends and capital gains because they can generate “homemade dividends” by selling a portion of their shares if they desire cash.

    Bird-in-the-Hand Theory

    This theory suggests that investors prefer dividends over capital gains because they perceive dividends as more certain, reducing risk. It argues that firms with higher dividend payouts are more attractive to risk-averse investors.

    Tax Preference Theory

    Investors may prefer capital gains over dividends due to favorable tax treatment. In many jurisdictions, capital gains are taxed at a lower rate or deferred until realized, whereas dividends are often taxed immediately.

    Signaling Theory (Bhattacharya, 1979)

    Dividends serve as a signal of financial health. Since poorly performing firms cannot afford sustained dividend payments, an increase in dividends suggests management confidence in future earnings. Conversely, a dividend cut can signal financial distress.

    Agency Theory and Free Cash Flow Hypothesis (Jensen, 1986)

    Dividends can mitigate agency problems by reducing the free cash flow available to managers, thus limiting their ability to engage in inefficient spending or empire-building. Regular dividend payments force companies to be disciplined in capital allocation.

    Determinants of Dividend Policy

    Several factors influence a firm’s dividend decisions:

    • Profitability – Firms with stable and growing profits are more likely to pay consistent dividends.
    • Growth Opportunities – High-growth firms often reinvest earnings into expansion, leading to lower or no dividends.
    • Liquidity Position – Even profitable firms may avoid dividends if they face cash flow constraints.
    • Debt Levels – Highly leveraged firms prioritize debt repayments over dividend distributions.
    • Taxation Policies – Tax treatment of dividends vs. capital gains affects investor preference and corporate policies.
    • Market Expectations – Investors expect stable or gradually increasing dividends; sudden reductions can lead to stock price declines.
    • Macroeconomic Conditions – Economic downturns, inflation, and interest rate changes impact corporate profitability and dividend policies.

    Dividend Policy Strategies

    In practice, companies adopt different dividend policies based on their financial strategy and market positioning:

    • Stable Dividend Policy – Fixed payouts irrespective of earnings fluctuations (e.g., Coca-Cola).
    • Constant Payout Ratio – A fixed percentage of earnings is paid as dividends.
    • Residual Dividend Policy – Dividends are paid after funding all capital investment opportunities.
    • Hybrid Dividend Policy – A mix of stable dividends and periodic special dividends.

    Dividends and Valuation

    Dividends are critical in valuation models, as they represent cash flows to shareholders.

    Dividend Discount Model (DDM)

    The Gordon Growth Model is a fundamental valuation tool:

    Formula of Dividend Discount Model (DDM)
    Formula of Dividend Discount Model (DDM)

    where:

    • P0= Current stock price
    • D1 = Expected next-year dividend
    • r = Required rate of return
    • g = Dividend growth rate

    This model applies to firms with stable dividend growth but is less effective for high-growth or non-dividend-paying companies.

    Discounted Cash Flow (DCF) Model

    DCF considers total cash flows, incorporating dividends as part of Free Cash Flow to Equity (FCFE). It provides a broader valuation approach beyond just dividends.

    Comparative Valuation

    Dividend yield (DP\frac{D}{P}PD) is commonly used to compare income-generating stocks. A higher yield may indicate undervaluation but could also signal financial distress.

    Empirical Evidence and Case Studies

    • Apple: Initially avoided dividends but introduced payouts in 2012 after accumulating substantial cash reserves, balancing growth and shareholder returns.
    • General Electric (GE): A significant dividend cut in 2018 led to a major stock price decline, showing the impact of investor expectations.

    Limitations of Dividend Analysis

    • Does Not Reflect Total Returns – Dividends exclude capital gains, potentially underestimating true investor returns.
    • Influence of External Factors – Regulatory policies, tax changes, and economic conditions impact dividend sustainability.
    • Not Suitable for Growth Stocks – Many high-growth firms reinvest profits, making dividend-based valuation ineffective.
    • Potential for Financial Misinterpretation – High dividends may indicate strong profitability or a lack of profitable reinvestment opportunities.

    Conclusion

    Dividends remain a crucial aspect of financial analysis, providing insights into corporate strategy, investor expectations, and firm valuation. While theories like M&M’s irrelevance hypothesis argue that dividends do not affect firm value, real-world evidence suggests that dividends play a significant role in investor preferences and market perception. Understanding dividend policies and valuation models equips finance students with the necessary analytical skills to evaluate investment opportunities and corporate strategies effectively.

    Why should I be interested in this post?

    For master’s students in finance, understanding dividends is essential for making informed investment decisions, evaluating corporate financial strategies, and mastering valuation techniques. Dividends are a key component of Total Shareholder Return (TSR) and play a crucial role in equity pricing models like the Dividend Discount Model (DDM) and Discounted Cash Flow (DCF) analysis. By studying dividends, students gain insights into capital allocation, corporate governance, and investor behavior—fundamental areas in asset management, investment banking, and financial advisory.

    Related posts on the SimTrade blog

    Modelling

       ▶ Isaac ALLIALI Understanding the Gordon-Shapiro Dividend Discount Model: A Key Tool in Valuation

       ▶ Lou PERRONE Free Cash Flow: A Critical Metric in Finance

       ▶ Isaac ALLIALI Decoding Business Performance: The Top Line, The Line, and The Bottom Line

    Data for dividends

       ▶ Nithisha CHALLA Compustat

       ▶ Nithisha CHALLA CRSP (Center for Research in Security Prices)

       ▶ Nithisha CHALLA Bloomberg

    Useful resources

    Academic articles

    Bhattacharya, S. (1979) Imperfect Information, Dividend Policy, and “The Bird in the Hand” Fallacy. The Bell Journal of Economics, 10(1), 259–270.

    Jensen, M. C. (1986) Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 76(2), 323–329.

    Miller, M. H., & Modigliani, F. (1961) Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), 411–433.

    Business

    Dividend University Dividend Irrelevance Theory

    Harvard Business School Publications The Effect of Dividends on Consumption

    Other resources

    Religare Broking What are Different Types of Dividends?

    Munich Business School Dividend explained simply

    CNBC What are dividends and how do they work?

    About the author

    The article was written in May 2025 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

    Greenwashing

    Nithisha CHALLA

    In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) delves into Greenwashing, providing a comprehensive analysis on forms of greenwashing, explaining its theoretical foundations, discussing the pros and cons in financial markets, and combating strategies.

    Introduction

    Greenwashing refers to the deceptive practice where companies exaggerate or falsely claim environmental responsibility to appear more sustainable than they actually are. In the financial world, this phenomenon has significant implications for investors, regulators, and corporate governance. As Environmental, Social, and Governance (ESG) investing gains prominence, understanding greenwashing is essential for finance students to critically assess sustainable investment strategies, corporate disclosures, and regulatory policies.

    The increasing demand for ESG-compliant investments has led to a surge in “sustainable” financial products. However, without proper oversight, some firms manipulate ESG metrics to attract investors without making substantive environmental improvements. This raises concerns about misallocated capital, ethical investing dilemmas, and potential financial risks associated with misleading sustainability claims.

    Definition and Forms of Greenwashing

    Greenwashing can take various forms, including:

    • Misleading Environmental Claims – Companies overstate or fabricate their sustainability achievements (e.g., claiming “100% eco-friendly” without verifiable data).
    • Selective Disclosure – Highlighting positive environmental efforts while concealing negative impacts (e.g., focusing on carbon-neutral initiatives but ignoring pollution).
    • Weak ESG Integration – Investment funds labeling themselves as “green” without rigorous ESG screening processes.
    • Third-Party Certification Abuse – Using unverified or non-standard sustainability labels to mislead investors.
    • Carbon Offsetting vs. Actual Reduction – Relying on carbon credits rather than actively reducing emissions.

    Theoretical Foundations of Greenwashing in Finance

    Several financial theories and principles help explain greenwashing’s impact on markets:

    Signaling Theory

    Companies use sustainability claims as market signals to attract investors. However, without proper verification, these signals can be misleading, distorting investment decisions.

    Agency Theory

    Conflicts of interest arise when management prioritizes short-term stock price gains over long-term sustainability. Greenwashing allows firms to create a perception of ESG compliance while avoiding substantive environmental actions.

    Market Efficiency Hypothesis (EMH)

    If markets are efficient, greenwashing should be priced in once uncovered. However, due to information asymmetry, investors may fail to detect deceptive ESG claims, leading to mispriced assets.

    Stakeholder Theory

    Companies engage in greenwashing to appease stakeholders—especially ESG-conscious investors and consumers—without necessarily implementing meaningful sustainability initiatives.

    Why Greenwashing Matters for Finance Students

    Several factors influence a firm’s dividend decisions:

    • Investment Risk Assessment – Identifying greenwashing helps investors avoid unsustainable firms that may face regulatory penalties or reputational damage.
    • ESG Portfolio Management – As ESG investing grows, finance professionals must differentiate genuine sustainability efforts from deceptive claims.
    • Regulatory Compliance – Understanding greenwashing is crucial for financial analysts and corporate advisors to ensure compliance with evolving ESG regulations.
    • Corporate Valuation and Due Diligence – Misleading ESG claims can artificially inflate stock prices, leading to incorrect valuation models.
    • Impact on Sustainable Finance – Greenwashing undermines the credibility of sustainable finance, affecting capital allocation and long-term environmental goals.

    Greenwashing in Financial Markets

    Greenwashing has infiltrated financial markets, particularly in:

    • ESG Investment Funds – Some “green” funds include companies with poor sustainability records, misleading investors.
    • Corporate Bonds & Sustainability-Linked Loans – Firms issue green bonds with vague sustainability targets that lack proper enforcement mechanisms.
    • Carbon Credit Markets – Companies buy carbon offsets instead of reducing emissions, creating an illusion of sustainability.
    • Stock Market Reactions – Firms accused of greenwashing often suffer stock price declines, highlighting its financial impact.

    Case Studies in Greenwashing

    • Volkswagen Emissions Scandal (2015) – VW falsely claimed its diesel vehicles met environmental standards while using software to cheat emissions tests. The scandal led to billions in fines and reputational damage.
    • DWS Group (Deutsche Bank) ESG Fraud Investigation (2021) – DWS misrepresented its ESG investment practices, leading to regulatory scrutiny and financial losses.
    • HSBC’s Misleading ESG Advertising (2022) – HSBC was fined for promoting its green initiatives while failing to disclose its continued financing of fossil fuel projects.
    • Fast Fashion’s False Sustainability Claims – Brands like H&M and Zara have faced accusations of greenwashing by launching “eco-friendly” lines while continuing unsustainable practices.

    Combating Greenwashing in Finance

    • Enhanced ESG Disclosures – Standardized and transparent ESG reporting requirements, such as the EU’s SFDR and the SEC’s climate disclosure rules.
    • Third-Party ESG Ratings – Relying on independent ESG rating agencies to verify sustainability claims.
    • Regulatory Actions – Government policies imposing strict penalties for false sustainability claims.
    • Stronger Due Diligence by Investors – Institutional investors integrating forensic ESG analysis to uncover misleading claims.

    Conclusion

    Greenwashing presents a major challenge in sustainable finance, misleading investors, distorting markets, and undermining genuine ESG efforts. For finance students, understanding greenwashing is crucial for responsible investment practices, corporate analysis, and financial decision-making. By developing a critical approach to ESG claims, finance professionals can drive real sustainability while protecting financial markets from misleading practices.

    Why should I be interested in this post?

    For finance students, greenwashing is not just an ethical issue—it has real financial consequences. As sustainable investing grows, ESG factors are increasingly integrated into portfolio management, risk assessment, and corporate valuation. However, misleading sustainability claims distort investment decisions, misallocate capital, and expose firms to reputational and regulatory risks.

    Related posts on the SimTrade blog

       ▶ Pablo COHEN Understanding Sustainable Finance through ESG Indexes

       ▶ Yirun WANG Sustainable Fashion: Trends, Innovations, and Investment Opportunities

       ▶ Anant JAIN The Future Of CleanTech: Innovations Driving A Sustainable World And Their Financial Implications

       ▶ Nithisha CHALLA Datastream

    Useful resources

    Wikipedia Greenwashing

    United Nations Greenwashing – the deceptive tactics behind environmental claims

    Plan A What is greenwashing and how to identify it?

    IBM What is greenwashing?

    About the author

    The article was written in May 2025 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

    Leveraged Finance: My Experience as an Analyst Intern at Haitong Bank

    Max ODEN

    In this article, Max ODEN (ESSEC Business School, Bachelor’s in Business Administration, 2021-25) shares his professional experience as an analyst intern working in the Leveraged Finance division at Haitong Bank in the Paris office.

    For those aspiring to work in Investment Banking but perhaps unsure which division which could perhaps suit you, this post provides a brief overview into what Leveraged Finance is and what goes on during a deal, using a leveraged loan transaction as an example.

    Haitong Bank

    Haitong Bank is a Lisbon-based investment bank whose roots can be traced back to China. The ultimate owner of the bank is Haitong Securities, one of the largest security houses in China who, in 2014, purchased the investment bank arm of Banco Espirito Santo – a Portuguese bank which was then rebranded to Haitong Bank. The bank has offices in major financial hubs in many continents in cities such as London, Paris, Macau, and Sao Paulo, where it offers services including Debt Capital Markets (DCM), Equity Capial Markets (ECM), asset management (AM), amongst others.

    Haitong Logo
    Haitong Logo
    Source: Company Website

    The Paris office opened in early 2023 and has a relatively small team working across mainly the Leveraged Finance, Structured Finance, and M&A divisions. The small size of the office means that you are immediately involved in transactions across the aforementioned divisions, and this was one the largest advantages of the 9-month internship I had, that I gained a high level of exposure to transactions. I got to experience things across different divisions but the vast majority of my time was spent in leveraged finance, working on deals spanning industries from healthcare to real estate development to consumables.

    A Brief Introduction to Leveraged Finance

    Simply put, Leveraged Finance, colloquially known as LevFin, involves providing debt capital to companies with an existing high-level of leverage and sub-investment-grade credit ratings to support operations such as leveraged buyouts (LBOs), mergers and acquisitions (M&A), debt refinancing, and recapitalisation efforts. Within an investment bank, the Leveraged Finance team partners with both corporations and private equity (PE) firms to raise this capital by syndicating loans and underwriting high-yield bond issuances. In this article, I will primarily discuss leveraged loans as this was the focus of my internship.

    Private Equity (PE) firms are notably large players within LevFin, and later on in this article, I will provide a brief insight into how a transaction is structured based upon a deal which we participated in during my internship for which I was the analyst. PE firms, when raising capital to fund the acquisition of a new company for their portfolio, tend to use a combination of equity and debt (as do many other classic corporations), in which they will tend to use a higher level of debt relative to equity as this increase the PE firm’s Internal Rate of Return (IRR). Without going into too much detail, this is because the less equity (cash) which a PE firm contributes to an acquisition, the higher the return on the cash-investment made.

    Investment-grade vs. Speculative-grade Debt

    Investment-grade and speculative-grade debt are the two broad classifications given to companies based upon their credit worthiness, as assessed by rating companies such as Standard & Poor’s (S&P), Moody’s and Fitch. These ratings reflect the likelihood that the issuer will meet its debt obligations. Note that each rating agency has slightly different notation form to classify a company’s credit worthiness, but in this article, we will refer exclusively to S&P’s rating format.

    Investment-grade debt refers to bonds or loans issued by entities that are considered low to moderate risk. These entities are expected to reliably meet their debt obligations, making them more attractive to risk-averse investors. Such ratings are often provided to mature, financially healthy companies such as Alphabet Inc. which has an AA credit rating from S&P.

    On the other hand, speculative-grade debt often referred to as high-yield or junk debt, includes bonds or loans issued by entities that carry a higher risk of default. These are considered non-investment grade and are rated BB+ or lower by S&P. These bonds and loans offer higher yields to compensate investors for the increased risk of non-payment. Birkenstock, despite being a globally recognised brand carries a BB+ rating from S&P, which makes it a speculative-grade company.

    The table below shows the broader classification of Investment-grade vs. Speculative-grade, and as you can see, these classifications can be broken down further with the lowest Investment-grade rating being BBB-. When a credit rating is given to a company, the rating agency will also provide an outlook of the rating: ‘Positive’, ‘Neutral’, or ‘Negative’, which logically refers to the likely evolution of the credit rating per the rating agency’s forecast for the company.

    Default Rates: Investment- vs. Speculative-grade Debt.
    Credit Rating Scales
    Source: Standard & Poor’s (S&P), Moody’s and Fitch

    The graph below shows the global default rates for Investment-grade and Speculative-grade companies, which clearly portrays the additional risk involves when investing into a company with the latter classification.

    Default Rates: Investment- vs. Speculative-grade Debt.
    Default Rates: Investment- vs. Speculative-grade
    Source: S&P.

    Further Interpretation of Credit Ratings

    Credit ratings are a telling metric before beginning a thorough analysis of a potential transaction, providing an insight into certain key metrics which are vital when interested lenders are evaluating the investment opportunity. As one would expect, as credit ratings become worse, we see a higher level of Net Leverage (Net Debt/EBITDA), lower Interest Coverage Ratio (EBIT/Interest Payments).

    The methodology of these credit ratings is not, however, merely a look at a company’s financial health; the rating agencies take a holistic approach, exploring all areas of a company, encompassing quantitative and qualitative factors. Although detailed credit rating reports are proprietary data provided by these agencies, concise reports can be publicly accessed such as this report on the credit rating of Birkenstock from June 2024.

    In the context of leveraged finance, logically, the better the credit rating of a company, the lower the interest rate they can borrow at. This simply comes back to the idea that the company is less likely to fall into bankruptcy, meaning that the lenders are taking a lower risk and will settle for a lower level of interest.

    Leveraged Loans: What are they and key characteristics

    As was alluded to earlier, we will be discussing primarily leveraged loans, as this was the debt instrument most relevant to my internship experience.

    Leveraged loans are structured for institutional investors and syndicated broadly to lenders, including commercial banks, collateralized loan obligation (CLO) vehicles, hedge funds, pension funds, and insurance companies.

    Most leveraged loans are senior secured instruments, meaning they are backed by the borrower’s assets and hold a first line claim in the capital structure. In the event of a default or bankruptcy, holders of these loans are first in line to be repaid from the liquidation of assets, ahead of subordinated debt and equity holders. This structural seniority tends to lower the expected loss in default scenarios. Capital structure and order of claims is vital for investors of junk and distressed debt, and I have included further readings at the end of this article which goes into further detail.

    Key Characteristics of Leveraged Loans

    • Secured: As mentioned, most leveraged loans are secured, often in the first or second lien, by assets owned by the company.
    • Floating Interest Rates: This is very common for leveraged loans. The interest paid on the loan is typically tied to a benchmark reference rate such as the EURIBOR 3M in Europe, plus a credit spread of a certain level e.g. 450bps. Note that this benchmark is normally floored at 0%, meaning that regardless of the actual reference rate, it will not be lower than 0 for the transaction in question.
    • Covenants: More restrictive due to the riskier nature of the debt. For clarity, covenants are clauses in the final agreement between the lender and the borrower which states certain aspects which the borrower must adhere to. This can include maximum Net Leverage ratios or limiting the ability to acquire other companies or participate in other activities. The limit is known as a basket; the dollar amount that a company may spend on specified activities, simply to minimise the chance that the borrower defaults.
    • Amortisation and Maturity: This is not necessarily a feature exclusive to leveraged loans, but generally speaking, the principal amount of the loan is normally amortised over the tenor of the loan which tends to be in the range of 4-8 years, although this can vary slightly. Loans whose principal is repaid in one lump sum payment are known as having a bullet repayment profile. Furthermore, although not common, early repayment is normally allowed, granted that lenders receive a so-called repayment premium.

    Players in a Leveraged Loan Transaction

    Before going through the transaction process, it can be easy to get lost in who’s who and their role. Therefore, bullet pointed below are some of the key players who together facilitate the completion of a transaction:

    • Borrower (Corporate or Portfolio Company). Typically a Speculative-grade company or a PE-sponsored portfolio company that is seeking to raise debt in order to achieve a certain goal e.g. fund acquisitions, refinance existing debt, or recapitalise the balance sheet. They will work together with the arranger to determine the structure, pricing, and timeline of the transaction whilst providing financial and operational data for due diligence and syndication.
    • Private Equity firm (if applicable). In the case of an LBO, for example, they are the leading force behind a transaction which involves the acquisition of a portfolio company. They will aim to maximise their IRR by leveraging the capital structure with high amounts of debt, whilst coordinating with the arranger to secure favourable terms and negotiate loan covenants.
    • Arranger/Lead Arranger/Mandated Leader Arranger. Works with the borrower to structure and underwrite the deal whilst advising on the loan size, maturity, interest margins, covenants, and any other aspect of the deal which is relevant. Oftentimes, they will also provide a bridge commitment or full underwriting prior to syndication, thus bearing the majority of the underwriting risk for which they will be rewarded with the largest portion of fees. Beside this, they will also prepare marketing materials which are provided to investors during the syndication including the Information Memorandum and the Lender’s Presentation.
    • Bookrunner. This role can also be carried out by arrangers of a transaction, hence a specified bookrunner isn’t always present in a transaction. Their role is to manage the syndication process of the deal including investor outreach and roadshows, whilst also arranging Q&A sessions between borrowers and lenders. Finally, they also maintain the order book of the transaction, also leading the pricing and allocation of debt.
    • Syndicate of Lenders. This group of investors can compromise of a variety of different players including banks, hedge funds, asset managers, and other institutional buyers. As investors, they will evaluate the transaction and decide whether to make an investment.

    Transaction Process of Leveraged Loans: A Step-by-Step Overview Breakdown

    A leveraged finance transaction can be a long process, with copious amounts of analysis required by front-office LevFin teams to ensure that the everyone involved in the process, predominately the potential lenders, have the complete image of the potential borrower and are able to evaluate the transaction to lead a successful execution of the deal.

    We have created a bite-sized summary below of how a transaction tends to be structured, followed by a short case study in which I was in the LevFin team who were investors in the syndication of a deal, not the arrangers – the role often associated with leveraged finance divisions at investment banks. Not all LevFin divisions play the role of investors, many banks only structure and syndicate a transaction, but at Haitong this is not the case.

    Origination and Identifying Opportunities

    The transaction process begins with origination, where investment banks or financial institutions identify potential leveraged finance deals with their clients. Origination typically involves private equity firms, corporations, and advisory teams assessing market conditions, financing needs, and potential acquisition targets. During this stage, the parties will explore the strategic goals of the transaction, such as financing an LBO, acquisition, or debt refinancing. This step of the process is normally led by the arranger.

    Structuring the Debt

    The next step involves the arranger structuring the debt to determine the optimal mix of loan and bond financing. Key decisions include the selection of the debt instruments (i.e., senior loans, subordinated debt, or high-yield bonds) and the terms and conditions that will govern these instruments, which are found in a term sheet. The structure is typically designed to align with the cash flow capabilities of the borrower while balancing the need for high returns for the lenders and investors. It is crucial to design the structure so that it is financially sustainable over time, without overburdening the company with debt.

    Underwriting

    This is an extension of the previous step in which a more detailed plan of the debt structure is organised by the arranger. Underwriting is a critical step where the investment bank assumes the responsibility for issuing the debt. During underwriting, the bank will assess the creditworthiness of the borrower, including detailed analysis of the company’s financials, industry, and cash flow projections. The pricing of the debt is also determined, which reflects the risk premium for the borrower’s credit quality. A higher-risk borrower will face higher interest rates and more stringent terms to compensate for the increased risk of default, as we have previously explored.

    Syndication – Spreading risk across multiple lenders

    In leveraged finance transactions, especially those with large debt amounts, syndication is a common practice. Syndication allows a group of lenders to provide portions of the loan, spreading the risk and reducing individual exposure. Typically, a lead bank (arranger or bookrunner) will organise the syndicate, and the transaction will be marketed to other banks and institutional investors. This process helps ensure that the transaction is fully subscribed and that the risk is distributed across multiple participants. During this phase, significant discussion is held between interested investors in which they can also negotiate certain covenants of the loan with the arranging bank.

    Case Study: From the Perspective of an Investor

    To give a bit more of an insight, I will describe the process which I participated in on the buyside of leveraged loan transaction whilst providing useful tips to avoid mistakes that I made during my first stint in LevFin. It is worth nothing that whilst every firm has slightly different internal procedures, after having spoken to other industry professionals, a similar structure is common. I’ve chosen to describe the buyside because if you are working in a traditional LevFin division, you are ultimately trying to sell a product; the debt, and gaining an insight into how a buyer acts can help to understand what they are looking for.

    With regards to the transaction, sensitive information cannot be disclosed, but it involved the financing of a PE firm’s majority-stake acquisition of a high-end global consumer goods brand, in which circa half of the overall transaction value, in the nine-figure range, was funded via debt with the remaining being equity provided by the acquirer.

    Invitation

    Last year, we were contacted by the arranging bank of the transaction, and we were invited to participate in the syndication of a leveraged loan including a Revolving Credit Facility (RCF), the former of which’s primary purpose was to finance the acquisition of a majority-stake in the target company. The RCF was for General Corporate Purposes.

    Once the invitation was accepted, the legal department of Haitong signed a Non-Disclosure Agreement (NDA), and we received all of the material which would allow us and any other potential investor to evaluate the feasibility of the deal. This included the Info Memo, Lender’s Presentation, financial statements of the target company, financial forecasts of the target company, indicative term sheet, and all due diligence, of which the latter constituted of around 3,000 pages of vendor due diligence, financial due diligence, tax due diligence, legal due diligence amongst others.

    Initial Analysis on Feasibility of Transaction Participation

    The first step when receiving all this material, at least when following the procedure during my internship, is creating a model which creates an estimate for the Return on Investment (ROI). The reason for this is that according to internal policies, we need to have a weighted-average ROI above a certain threshold when investing in debt securities, and should the ROI not be compatible, then we cannot move ahead with the transaction. It would be redundant to complete a full analysis of the transaction, only to realise after that it is not feasible.

    Building this model is a fairly straight-forward task once familiar with the mechanics of the model. It relied on various inputs of which the most notable were a) the margin of the loan b) the tenor of the loan c) the credit rating of the borrower. However, the borrower of the transaction, also the target company of the acquirer, was a private company and did not have a credit rating provided by any rating agency, thus I had to make a credit assessment of the borrower.

    At Haitong, we used the S&P Methodology when constructing these ratings, and as you will recall from earlier, this entails conducting a thorough analysis on the quantitative and qualitative factors of the company. Quantitative inputs when creating a credit assessment report are largely historical – looking at the past financial performance of the company, whereas the qualitative inputs are more forward-looking, examining factors relating to market risk, for example, which could hinder future growth. In this instance, I had plenty of due diligence material which helped me to evaluate all the metrics which together helped provide a final credit rating, which indicated that the borrower was highly rated within the speculative-grade classification, circa BB.

    The initial ROI calculation on this transaction indicated a 14% return, a rather significant figure given the initial credit rating, surpassing our internal requirements, thus we could proceed to complete the first stage of our internal processes, known as ‘pre-screening’. This is a circa 10-minute presentation in which the front office staff such as myself have to present an overview of a proposed transaction to senior decision makers at the bank, often involving senior managing directors, with the goal to gain initial approval to move onto the next stage of the process. It is worth mentioning, that such a transaction, like any other, has a buyer and seller (in this case the debt). Therefore, at this stage, there can exist an opportunity to negotiate the terms of the debt, if you deem that the loan has been priced too conservatively i.e., that the interest margin is too low for the level of risk involved.

    Preparation of Pre-Screening Presentation

    For about two weeks, I would sift through countless documents extracting the most important aspects of the transaction and the borrower, so that when I presented this information to the senior members, I would clearly be able to describe the proposed deal including its purpose, security (collateral) put up amongst other aspects. In addition, I would have the answers to any question they could ask me whether it be about the covenants of the term sheet, the borrower’s supply chain or their growth strategies. However, given the early stage, this presentation, as indicated by the name, is merely a screening of the transaction and in-depth analysis is not yet required.

    When looking at such a transaction, whilst it is good to know the reasons why this transaction can be beneficial to the bank, it is even more important to understand the risks involved, ranging from market risk to business risk.

    If there was one thing that I would like you to take away, it would be to not underestimate the importance of the term sheet/senior facilities agreement. This is a document which lays out all the terms and conditions of a loan, almost like rulebook which the borrower and lender must abide by. Simply put, you are providing tens of millions of euros to a company, and this document will spell out your rights, and seek to contain the risk involved in a transaction. Understanding such a document is not easy, they are extremely long and written in legal jargon, but in doing so you understand how your risk is being minimised through what is spelled out in the term sheet/senior facilities agreement and provides you with an understanding as to what happens in case of default by the borrower and how you can make claims to make up for monetary losses – a worst case scenario.

    The challenge in presenting a transaction is that you have to be as thorough as you can whilst keeping it as concise as possible. It is easy to focus on unimportant aspects, wasting valuable time to convince your audience/decision-makers to support your case. Equally, however, after having spent 2 weeks gathering information non-stop, it can be easy to forget that your audience have no context as to what you’re speaking about, and you must make every point abundantly clear.

    I think that anyone who has worked in investment banking can share a similar sentiment that bankers are impatient, and I count myself as part of that group; they want as much information in as little time as possible, and if you can’t communicate effectively, you will struggle to succeed. I have been on both sides of this but as an example, prior to this transaction, I had failed to do so, and I did not gain approval to move ahead with the transaction despite its strong fundamentals.

    In the end, after answering a few questions from the senior bankers pertaining to the pro-forma structure after closing of the acquisition and the supply chain risk, we gained approval to move forward to present in front of the Executive Committee (ExCo), a 20-minute presentation with a Q&A session thereafter. At this point, you are presenting in front of the most senior bankers in the firm including the CEO.

    Preparing for the ExCo

    This is by far the most challenging part of a transaction from a buyside perspective. You, as a front office employee, are coordinating with several departments internally at the bank such as portfolio management and risk, as well as the arranging bank to request more information which you require to conduct a full analysis. Alongside doing so, you are ensuring the constant progress of the transaction, knowing that there are commitment deadlines after which point you will not be allowed to invest into the transaction.

    The key is to keep organised, and that applies to everything.

    You will have hundreds of documents related to one particular transaction being sent around from different departments, ranging from legal compliance certificates to intricate financial models. Therefore, I urge you that from the start, before even having reached this point, that you create neatly organised desktop folders, special Outlook folders – this will save the team time and avoid miscommunications and costly time delays. Even seemingly less important things such as formatting conventions when building financial models in Excel will minimise errors and spare you hours of time looking for a singular source of circularity across 20 tabs late at night.

    For example, during this transaction, a modified financial model which had originally been provided by the arranging bank was sent to the risk department from a front office member, not the original as thought. When this was made apparent when the risk analyst presented their findings after a weeks’ worth of work, it almost caused us to miss the commitment deadline. Fortunately, the ramifications weren’t significant, but an addition of a singular row in the original Excel could have costed us this transaction, highlighting the importance of being organised and having extreme attention to detail.

    With regards to the tasks involved in this stage, it is an extension of the first phase before presenting for the Pre-Screening, the difference being that this time you go into much more detail. You are expected to understand all of the risks involved in this transaction, and you are expected to have incorporated these risks into quantifiable figures which are modelled in Excel through a forecast looking circa 5 years ahead. Therefore, being not only proficient in using Excel, but being able to create integrated forecasts for particularly the Income Statement and Cash Flow Statement, is vital, particularly if you want to set yourself apart from others in an industry which is already extremely competitive.

    These scenario and sensitivity analyses are typically derived from management forecasts and due diligence reports which cover all business areas. But once again, you are expected to present your finding in a concise manner whilst relaying the most important aspects of the transaction, with a particular focus on the risks and mitigants, strengthening your case.

    The loan in question for this transaction had a tenor of 7 years, meaning that it would mature in mid-2031, and had a bullet repayment profile. When looking at a transaction whose repayment is structured like so, one of the largest risks is the refinancing risk; the risk which looks at a borrower’s ability to issue new debt before the existing debt matures to be able to repay this existing debt. If a borrower is unlikely to be able raise debt, it would be extremely difficult to justify investing in such debt.

    For this deal, there was some doubt raised as to the borrower’s ability to meet this criterion, with downside case cash flow forecasts indicating that it would potentially become an issue. However, my team were confident in the company’s financial trajectory based upon our analyses, that would see it unlikely that the downside case would be what we would ultimately see down the line. Coupled with a strong core business, we were able to mute these doubts.

    As was alluded to earlier, this was senior secured debt, meaning that the borrower posted security over items such as bank accounts, accounts receivable, and other assets on the balance sheet. However, there was some concern from the ExCo regarding this as a significant portion of the assets on the borrower’s project balance sheet was tied to goodwill, an intangible asset which cannot be converted to physical cash. Despite this, we deemed that the PE sponsor of the transaction mitigated part of this risk, as well as historical data indicating that the company would continue to grow exponentially throughout the tenor of the loan.

    After a 2-hour presentation and Q&A session, we gained approval for this transaction, at which the legal department from each respective bank (Haitong and the arranger) would finalise the documentation. At this point, the grunt work is done and the only remaining thing is to complete Key Your Customer (KYC) forms.

    Takeaways from my Internship Experience

    Overall, my internship in leveraged finance provided me with invaluable insight into the fast-paced and intellectually challenging world of structured debt. I developed a strong understanding of how complex transactions are structured, from initial credit analysis to syndication and documentation. One of my key takeaways was the importance of balancing risk and return – not just in terms of financial metrics, but also in assessing the borrower’s industry dynamics, capital structure, and covenant protections. I also gained exposure to how lenders protect themselves through mechanisms like security interests and covenants, such as more complicated uses of floating charges over assets. Beyond technical knowledge, I learned the importance of attention to detail, clear communication, and collaboration across teams, all of which are essential in executing successful deals. By the end of the 9-month period, the experience solidified my interest in pursuing a career in leveraged finance.

    Three Skills to Bring into a Role in Leveraged Finance

    Finally, to pass on some wisdom to those who would perhaps be interested in pursuing career or just an internship in LevFin… Whilst there are many skills which are rather general to be able to succeed in finance and/or investment banking such as understanding the relationship between the three financial statements and being able to build a 3FS model from scratch, I will focus on three which are slightly more relevant when working in a Leveraged Finance division.

    Deep understanding of capital structure

    A comprehensive understanding of capital structure is foundational in LevFin, as it underpins nearly every transaction the team is involved in. Analysts must assess how different layers of financing, ranging from senior secured debt to mezzanine and equity, interact within a company’s balance sheet. This knowledge is essential for determining how much debt a company can sustain, how it should be structured, and where different investors sit in the hierarchy of repayment in the event of default. For instance, in an LBO, the sponsor and the arranging bank must work closely to optimise the mix of debt and equity in order to minimize the cost of capital while preserving financial flexibility. A firm grasp of capital structure also allows analysts to assess the impact of leverage on valuation, control, and credit risk, ensuring that the financing solution supports the strategic objectives of both the borrower and the investor base. At the end of this article, I have provided names of books and further readings including a book by Stephen Moyer. This is the gold standard when learning about capital structure and would thoroughly recommend it to those looking to further their knowledge.

    Organisation

    It may seem like an obvious soft skill to have, but its importance cannot be overstated. From the first day, as a LevFin analyst you need to give yourself the best possible to succeed in a high-tempo environment. If you are working within origination, it is possible that you are working on up to 6-7 deals at once which means that you are working with hundreds of documents, creating info memos, lenders’ presentations, financial forecasts etc. These documents will be sent around from different companies and departments, ranging from legal compliance certificates to intricate financial models. Therefore, I urge you that from the start, before even having reached this point, that you create neatly organised desktop folders, special Outlook folders – this will save the team time and avoid miscommunications and costly time delays. Even seemingly less important things such as formatting conventions when building financial models in Excel will minimise errors and spare you hours of time looking for a singular source of circularity across 20 tabs late at night.

    Clear communication

    This refers to both oral and written communication. Aside from being an essential skill in any workplace, it is even more key when working in LevFin. Whether you are working in origination, and structuring a transaction and creating marketing materials, or acting on the buyside of the deal, you will have to communicate with other parties, internally and externally, create summaries and presentations for a specific audience for a specific goal in mind. This is especially a challenge given the complicated nature of leveraged finance transactions. The best communicators are those who make the complex idea seem simple, and if you can master this art which is extremely difficult, you’re halfway there.

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       ▶ Basma ISSADIK My experience as an M&A Analyst Intern at Oaklins Atlas Capital

    Useful Resources

    LCD Leveraged Loan Primer, S&P. This article was a brief, non-technical overview of leveraged finance, and specifically leveraged loans. If you want to understand more about such topics, primers are a great source of information for understanding market dynamics and trends, as well as other characteristics of loans.

    Moyer S.G. (2004) Distressed Debt Analysis: Strategies for Speculative Investors, J. Ross Publishing. The gold standard for those who want to work in restructuring (but also LevFin), this is a rather in-depth read, and ventures into how firms such as hedge funds evaluate distressed debt investment opportunities. However, the first circa 250 pages are extremely information when learning about topics such as capital structure which is imperative for leveraged finance.

    About the Author

    The article was written in April 2025 by Max ODEN (ESSEC Business School, Bachelor in Business Administration, 2021-25). Should you have any questions for Max, or simply connect, do not hesitate to reach out to him on LinkedIn.

    Sustainable Fashion: Trends, Innovations, and Investment Opportunities

    Yirun WANG

    In this article, Yirun WANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025) explains about recent developments and opportunities of sustainable fashion.

    The Rise of Sustainable Fashion: Innovation Meets Consumer Demand

    The fashion industry, historically known for its significant environmental footprint, is undergoing a profound transformation. Brands are increasingly adopting eco-friendly materials and processes to reduce their impact on the planet. From recycled fabrics and biodegradable textiles to innovative solutions like lab-grown leather and waterless dyeing technologies, the industry is embracing groundbreaking advancements that prioritize sustainability.

    Leap® by Beyond Leather
     Leap® by Beyond Leather
    Source: the company.

    Leap® by Beyond Leather
     Leap® by Beyond Leather
    Source: the company.

    A key driver of this shift is the changing behavior of consumers, particularly among younger generations. Today’s shoppers are more informed and conscientious, demanding greater transparency and accountability from brands. They want to know where their clothes come from, how they are made, and whether the production processes align with ethical and environmental standards. This growing demand for sustainable products is pushing brands to rethink their strategies and integrate sustainability into their core values. Companies that fail to adapt risk losing relevance in an increasingly competitive market, while those that embrace sustainability are gaining a competitive edge and building stronger connections with their customers.

    Investment Trends: Capital Flowing into a Greener Future

    The sustainable fashion movement is not just reshaping consumer behavior—it’s also attracting significant attention from investors. Venture capital and private equity firms are increasingly directing funds toward startups and established brands that prioritize environmental and social responsibility. One area of particular interest is circular fashion, a model that emphasizes designing products for reuse, recycling, or upcycling. This approach not only reduces waste but also creates new revenue streams and business opportunities.

    Industry leaders Brunello Cucinelli and Matteo Marzotto have invested in YHub, a pioneering company at the forefront of traceability and sustainability technologies. YHub’s innovative platform enhances supply chain transparency by enabling businesses to verify the ethical origins and environmental credentials of their products. This strategic move reflects a broader trend of capital shifting toward green innovations, as the fashion and luxury sectors increasingly prioritize sustainable practices in response to growing consumer demand for accountability and ethical production.

    Additionally, ESG (Environmental, Social, and Governance) criteria are becoming a critical factor in investment decisions. Investors are looking for brands that demonstrate a clear commitment to reducing waste, improving labor conditions, and minimizing their environmental impact. This trend reflects a broader recognition that sustainability is not just a moral imperative but also a smart business strategy. Brands that align with these values are more likely to secure funding, attract loyal customers, and thrive in a rapidly changing market.

    Why should I be interested in this post?

    The intersection of sustainability and fashion represents a pivotal moment for the industry. It’s not just about creating eco-friendly products; it’s about reimagining the entire lifecycle of fashion—from design and production to consumption and disposal. This shift is driven by a combination of innovation, consumer demand, and investment, all of which are working together to create a more sustainable future.

    This article offers a comprehensive look at the forces driving this transformation and the opportunities it presents. Whether you’re a consumer looking to make more informed choices, an investor seeking promising opportunities, or simply someone interested in the future of fashion, understanding these trends is essential. The move toward sustainability is not just a trend—it’s a fundamental change that will define the fashion industry for decades to come.

    Related posts on the SimTrade blog

       ▶ Anant JAIN Dow Jones Sustainability Index

       ▶ Yirun WANG My Internship Experience at Impact Hub Shanghai

    Useful resources

    Women’s Wear Daily (WWD) (24/06/2024) Brunello Cucinelli, Matteo Marzotto Investing in YHub, a Leader in Technologies for Traceability and Sustainability

    Forbes (26/04/2024) The Importance of Sustainability In Fashion

    McKinsey (11/11/2024) The State of Fashion 2025: Challenges at every turn

    About the author

    The article was written in April 2024 by Yirun WANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025).

    Understanding Sustainable Finance through ESG Indexes

    Understanding Sustainable Finance through ESG Indexes

    Pablo COHEN

    In this article, Pablo COHEN (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024–2025) explores how sustainable finance is reshaping investment strategies through ESG indexes.

    Introduction and Context

    For decades, success was measured through financial indicators. Profits defined companies, and GDP per capita ranked nations. But as Robert F. Kennedy pointed out, GDP “measures air pollution and cigarette advertising… and ambulances to clear our highways of carnage.” It reflects economic activity, not societal well-being”.

    Our actions shape the climate, ecosystems, and social outcomes — and those same forces now pose real risks to economies. France may have a far higher GDP per capita than El Salvador, but which emits more carbon per citizen? Which has a credible plan for net-zero by 2050? These questions are more relevant to long-term sustainability.

    To enable meaningful comparisons, global bodies like the UN and EU have created frameworks and standards for sustainability reporting. Tools such as the EU Taxonomy, SFDR, and CSRD bring structure and consistency to ESG disclosures, helping investors assess corporate impact and redirect capital toward sustainable outcomes. If we don’t change what we measure, we won’t change what we prioritize — or what we build.

    How ESG Indexes Work

    We have an impact on the world, and the world has an impact on us. That’s the essence of double materiality — a foundational concept in sustainable finance. Sustainability risks, whether physical (like climate disasters) or transitional (like policy shifts), can directly affect financial performance through credit risk, operational disruption, legal exposure, and reputational damage.

    Just as external events shape a company’s bottom line, financial decisions influence the environment and society. This two-way relationship is increasingly recognized by regulators and investors alike. Navigating it requires tools that make ESG performance measurable, comparable, and investable. This is where ESG indexes come into play.

    ESG indexes allow investors to evaluate companies based on their sustainability profile. Depending on their design, they may exclude controversial sectors, highlight ESG leaders, track themes like clean energy, or align with climate targets such as the 1.5°C scenario. Examples include the MSCI ESG Leaders and Climate Paris Aligned Indexes, the S&P 500 ESG Index, FTSE4Good, and the Dow Jones Sustainability Index. These indexes are used not only as benchmarks, but as a basis for constructing portfolios that reflect long-term sustainability goals.

    The growth of ESG indexes and sustainable funds has mirrored the rising demand for more responsible investment strategies. The following chart shows how both active and passive sustainable funds have surged over the past decade:

    ESG Fund Growth Chart.
     ESG Fund Growth Chart
    Source: Morningstar Direct.

    ESG in Practice and Market Performance

    Index construction starts with exclusions — companies involved in fossil fuels, weapons, or major ESG controversies are filtered out. Then comes ESG scoring, based on data from corporate disclosures, regulatory filings, and third-party assessments. Companies are evaluated across environmental impact, social responsibility, and governance quality. This might include emissions intensity, labor practices, or board independence. Based on these scores, indexes select and weight constituents and are rebalanced periodically to reflect updated data.

    The MSCI Climate Paris Aligned Index is designed to align with a 1.5°C scenario. It reduces both physical and transition risks by excluding fossil-fuel-intensive companies and emphasizing those with low emissions and strong climate governance. Compared to its parent index, the MSCI ACWI, it includes fewer companies but achieves a 50% reduction in portfolio carbon intensity. It’s a forward-looking tool that anticipates tightening regulations and evolving investor expectations.

    Some ESG funds have even outperformed traditional benchmarks like the S&P 500. The chart below shows that several ESG funds delivered significantly higher year-to-date returns in early 2021:

    ESG Fund performance compared to the S&P 500 index.
     ESG Fund performance compared to the S&P 500 index
    Source: S&P Global Market Intelligence.

    This outperformance isn’t just recent. In 2019, sustainable large-blend index funds consistently beat the S&P 500 — with many delivering returns above 32%, as the following chart demonstrates:

    Sustainable Funds Performance (year 2019).
    Sustainable Funds 2019 Performance
    Source: Morningstar Direct.

    The rise of ESG is also visible in fund flows. More sustainable funds are being launched each year, and investor inflows have reached record levels — confirming that ESG isn’t just a trend, it’s a lasting shift in investment priorities.

    Why should I be interested in this post?

    As an ESSEC student preparing for a career in finance, understanding sustainable finance is no longer optional. ESG principles are reshaping how capital is allocated, how companies report, and how investment strategies are built. Whether you’re pursuing a role in banking, asset management, consulting, or entrepreneurship, knowledge of ESG frameworks and sustainable indexes will be essential for making informed, future-ready decisions in a rapidly changing financial landscape.

    Related posts on the SimTrade blog

       ▶ Anant JAIN The Future Of CleanTech: Innovations Driving A Sustainable World And Their Financial Implications

       ▶ Anant JAIN Milton Friedman VS Archie B. Carroll On CSR

       ▶ Anant JAIN The Paris Agreement

       ▶ Anant JAIN The World 10 Most Sustainable Companies in 2021

       ▶ Anant JAIN Green Investments

       ▶ Anant JAIN United Nations Global Compact

    Useful resources

    Morgan Stanley (2023) Sustainable Funds Outperformed Peers in 2023

    IEEFA ESG Investing: Steady Growth Amidst Adversity

    Morgan Stanley (2024) Sustainable Funds Modestly Outperform in First Half of 2024

    IEEFA ESG Funds Continue to Outperform

    S&P Global Most ESG Funds Outperformed S&P 500 in Early 2021

    Morningstar U.S. ESG Funds Outperformed Conventional Funds in 2019

    The Economist American Sustainable Funds Outperform the Market

    About the author

    This article was written in April 2025 by Pablo COHEN (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024–2025).