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

May 11, 2025 by 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.

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.

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

May 11, 2025 by Olivia BRÜN

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.

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.

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

Optimal capital structure with no taxes: Modigliani and Miller 1958

May 8, 2025 by 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:

V_L is the value of a levered firm using debt.

V_U 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 (r_E) to compensate for higher financial risk.

When a firm increases its leverage, its cost of debt (r_D) is typically lower than its cost of equity (r_E) 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 (r_E), as shareholders demand greater compensation for bearing the amplified risk exposure.

where:

r_E = cost of equity for a levered firm

r_U = cost of equity for an unlevered firm

r_D = 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

r_E = Cost of equity (which increases with leverage)

r_D = 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 × r_D

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

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

DCF Formula for constant perpetual cash flows:

For Equity Holders:

100% Equity Case: PVE = 10M/10% = 100M

40% Debt, 60% Equity Case: PVE = 8M/13% = 60M

For Debt Holders (PV of Debt):

40% Debt, 60% Equity Case: PVD= 2M/5% = 40M

The firm’s total value is always equal to the sum of the present values of equity and debt. This confirms the Modigliani-Miller capital structure irrelevance theorem, which states that in a perfect market, the financing mix does not change the total value of the firm.

Takeaways on Optimal Debt Structure and Bankruptcy Costs from M&M 1958 Propositions

The Modigliani-Miller Theorem provides a foundational understanding of how capital structure affects firm value. Proposition I tells us that in a perfect market with no corporate tax, the choice between debt and equity does not impact a company’s total value. However, Proposition II highlights that increasing debt makes equity riskier, which raises the cost of equity and offsets the benefits of cheaper debt.

Why Should I Be Interested in This Post?

The Modigliani-Miller (MM) 1958 theorem revolutionized corporate finance by demonstrating that, in a perfect market without corporate taxes, a firm’s capital structure (debt vs. equity) does not affect its overall value. This insight laid the foundation for modern finance theory, influencing corporate decisions on capital budgeting, M&A, and risk management. While real-world factors like taxes and bankruptcy costs modify MM’s conclusions, its core principles remain central to understanding cost of capital, leverage effects, and financial strategy. MM 1958 theory provides a theoretical framework that underpins advanced topics in corporate valuation, investment strategy, and capital markets.

Useful resources

US Courts Data – Bankruptcy

S&P Global – Bankruptcy Stats

Statista – Bankruptcy data

About the author

Snehasish CHINARA

Grande Ecole

Solvency and Insolvency in the Corporate World

May 8, 2025May 7, 2025 by 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.

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.

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

May 7, 2025 by 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.

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

May 2, 2025 by Agnès 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

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

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.

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

May 2, 2025May 1, 2025 by 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

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

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)

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.

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

May 2, 2025May 1, 2025 by 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)

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.

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

May 1, 2025 by 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.

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

May 1, 2025April 17, 2025 by 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

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.

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.

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

April 14, 2025 by 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

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.

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

April 11, 2025 by Pablo COHEN

Understanding Sustainable Finance through ESG Indexes

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.

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.

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.

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).

My Internship Experience at Impact Hub Shanghai

April 8, 2025 by Yirun WANG

In this article, Yirun WANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025) shares her internship experience at Impact Hub Shanghai, a global network focused on empowering sustainable business innovation. As an Inclusive Innovation intern, I had the opportunity to contribute to impactful projects while gaining valuable insights into sustainability, entrepreneurship, and cross-sector collaboration. This experience not only deepened my understanding of sustainable consumption but also connected me to the broader world of impact investing and the financial ecosystem that supports sustainable development.

About the company

Impact Hub Shanghai is part of a global network of over 100 hubs in 60+ countries, dedicated to fostering sustainable business practices and social innovation. The organization supports entrepreneurs, startups, and corporations in driving positive changes through initiatives like sustainability advocacy, innovation consulting, and impact investment services.

Impact Hub Shanghai’s mission is to inspire, enable, and connect individuals and organizations to create a more sustainable and inclusive future. Their work spans various sectors, including climate action, circular economy, sustainable consumption and gender equality, making them a key player in China’s sustainability ecosystem.

Logo of the Impact Hub Shanghai.
Logo of Impact Hub Shanghai
Source: the company.

My internship

During my two-month internship, I worked as a Business Development and Marketing Assistant, supporting projects related to sustainable consumption, circular economy, and inclusive innovation. This role allowed me to engage in diverse tasks, from industry research and branding to event planning and client communication, while also exploring the intersection of sustainability and finance.

My missions

As an intern, I was involved in several key activities:

Business Development: I conducted industry research and prepared three industry reports on topics like sustainable consumption and the transition to net zero. This involved analyzing market trends, identifying opportunities for innovation, and summarizing findings for internal and external stakeholders.
Branding & Communication: I contributed to the development of an Integrated Marketing Communication plan and wrote/edited WeChat manuscripts to promote Impact Hub Shanghai’s initiatives. This required creativity, attention to detail, and an understanding of the target audience.
Event Planning: I supported the planning and execution of three events, including the RISE UP! Sustainable Life Fest, which aimed to raise awareness about sustainable living. I also assisted in organizing two offline events, which involved coordinating with partners, managing logistics, and ensuring smooth execution.

Required skills and knowledge

This internship was an excellent opportunity for students like me, who are passionate about sustainability and business innovation. While it didn’t require specialized expertise, the role demanded a strong foundation in business concepts, research skills, and the ability to adapt quickly to new challenges.

Key skills included:

Analytical Thinking: Interpreting data and trends to support decision-making.
Communication: Crafting clear and compelling messages for diverse audiences.
Teamwork: Collaborating with colleagues and external partners to achieve common goals.
Adaptability: Learning new tools and approaches to address emerging challenges.

Additionally, staying updated on sustainability trends and understanding the broader context of social and environmental issues were crucial for contributing effectively to the team’s efforts.

What I learned

This internship was a transformative experience, providing me with a deeper understanding of sustainable business practices and the role of innovation in driving positive change. I gained practical skills in research, branding, and event management, which are applicable to future roles in sustainability and business development.

One of the most valuable lessons was the importance of collaboration and cross-sector partnerships in addressing complex global challenges. Working with diverse stakeholders, from entrepreneurs to corporate leaders, taught me how to navigate different perspectives and find common ground for impactful solutions.

Related financial concepts

I detail below three financial concepts related to my internship: Impact Investing & Sustainable Investment, Circular Economy & Net-Zero Transition, and Corporate Social Responsibility (CSR) & Branding.

Impact Investing & Sustainable Investment

Exposure to Impact Hub Shanghai’s investment arm deepened my understanding of how impact investing firms assess sustainability-driven ventures. I gained insight into how capital is allocated to businesses that generate financial returns while driving positive social and environmental outcomes.

Circular Economy & Net-Zero Transition

My work on industry reports deepened my understanding of business models focused on resource efficiency and carbon neutrality. My work on the RISE UP! Sustainable Life Fest highlighted the importance of sustainable consumption in reducing environmental impact. Through this project, I learned how businesses can align their strategies with sustainable consumption principles, such as offering reusable products, reducing packaging waste, and promoting circular economy practices.

Corporate Social Responsibility (CSR) & Branding

My internship also exposed me to the broader financial ecosystem that supports sustainability. From green bonds to ESG investing, I gained insights into how financial markets are evolving to prioritize sustainability. I gained insight into how companies integrate sustainability into their brand identity and business strategies to create positive social impact.

Why should I be interested in this post?

My internship at Impact Hub Shanghai reinforced my belief in the power of business and finance to drive positive change and equipped me with the tools to contribute meaningfully to a more sustainable future if you are also interested in sustainable and responsible investment concepts.

Useful resources

Impact Hub

Global Reporting Initiative (GRI)

World Economic Forum What are green bonds and why is this market growing so fast?

Sustainable Finance

Global Impact Investing Network What you need to know about impact investing?

United Nations Development Programme Harnessing Financial Instruments for Impact Investing

About the author

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

My internship experience in Business Development at Pelikan Mobility

April 7, 2025 by Pablo COHEN

In this article, Pablo COHEN (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024–2025) shares insights from his internship experience in Business Development at Pelikan Mobility.

About the company

Pelikan Mobility is a French startup founded in 2022 that provides tech-enabled leasing solutions for electric vehicle (EV) fleets, emphasizing an EV-native and operations-centric approach. The company leverages digital twin technology and optimization algorithms to offer customized, cost-effective leasing options that enhance the productivity and efficiency of mission-critical, last-mile, and middle-mile commercial fleets.

In March 2024, Pelikan Mobility raised a €4 million seed funding round from investors including Pale Blue Dot, Frst, and Seedcamp. The company’s mission is to make commercial fleet electrification scalable and cost-effective by addressing inefficiencies in EV adoption and providing solutions related to fleet management, charging infrastructure, energy optimization, and route planning.

Logo of Pelikan Mobility.

Source: the company.

My internship

As an intern, I joined the Business Development team at a time when Pelikan Mobility had fewer than 10 employees. The startup environment allowed me to participate in various cross-functional activities beyond my designated team. My primary focus was on analyzing the annual and CSR reports of prospective clients, identifying operational data related to their vehicle fleets and emissions strategies.

My missions

My role involved conducting in-depth research on companies’ operations to estimate their Scope 1, 2, and 3 emissions and assess how aligned they were with their publicly stated sustainability roadmaps. By examining the size and composition of their vehicle fleets and analyzing their emission reduction goals, I was able to generate strategic reports evaluating their potential as Pelikan clients. These reports were used to segment companies by sector—such as utilities, maintenance, and delivery—and tailor use cases and pitch decks accordingly.

The objective was to demonstrate that by optimizing EV use through Pelikan’s tools, companies could significantly reduce their emissions while increasing their return on investment by lowering total cost of ownership (TCO) over time. Our analyses guided companies in selecting the most operationally suited EV models, thereby improving vehicle lifetime value and reducing long-term costs.

Required skills and knowledge

Success in this role required familiarity with emissions reporting methodologies and a solid understanding of how to read and interpret annual reports. I had to be well-versed in corporate sustainability roadmaps and regulations, particularly French mandates that require companies to incrementally electrify their fleets. Awareness of client motivations—mainly cost reduction or revenue growth—was key to positioning Pelikan’s offer persuasively. Demonstrating profitability first and sustainability second was essential in our outreach efforts.

What I learned

This internship gave me a front-row seat to the intersection of regulation, sustainability, and business operations. I discovered how procurement officers adopt new technologies—not just through cost-benefit analysis, but also through trust, relationship-building, and presentation. I gained a deeper understanding of how regulation shapes corporate decision-making and realized the importance of awareness and education in encouraging sustainable transitions. Just like in fine dining, how the idea is presented is often as important as the idea itself.

Financial concepts related my internship

I present below three financial concepts related to my internship: total cost of ownership, regulatory risk, and sustainability reporting.

Total Cost of Ownership (TCO)

TCO refers to all costs associated with acquiring and operating a vehicle over its lifespan. For EV fleets, this includes not only the purchase or lease cost but also charging infrastructure, electricity prices, maintenance, downtime, and resale value. At Pelikan, our role was to show that, despite higher upfront costs, the long-term operational savings with EVs often made them more cost-effective than internal combustion engine (ICE) vehicles.

Regulatory risk

Companies today face increasing regulatory pressure to decarbonize. Non-compliance with environmental laws—such as failing to electrify a mandated percentage of fleet vehicles—can lead to financial penalties or reputational harm. Our value proposition directly addressed this risk by helping companies stay compliant through optimized EV integration, reducing exposure to regulatory fines.

Sustainability reporting

Reliable measurement and reporting of emissions from both ICE vehicles and EVs are essential for effective sustainability disclosure. We helped companies track and report their Scope 1 emissions (from owned fleets) accurately. This data was not only critical for compliance but also for setting realistic, measurable goals in their CSR strategies.

Why should I be interested in this post?

This post offers a firsthand look at how sustainability, operations, and finance intersect in a startup environment. If you’re interested in working in sustainable finance, ESG consulting, or mobility innovation, this experience demonstrates how regulatory knowledge, financial analysis, and persuasive communication come together in real-world client engagement. The strategic and technical skills developed here are highly transferable to roles in consulting, private equity, or corporate sustainability teams.

Useful resources

Pelikan Mobility

Tech.eu (21/03/2024) Pelikan Mobility Seed Funding Announcement

TechCrunch (21/03/2024) Pelikan Mobility is building a software-enabled commercial EV leasing solution

Charged EV (29/03/2024) Pelikan Mobility raises €4 million in funding for its EV fleet management software platform

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).

About the Cameroonian Real Estate Market

May 11, 2025February 26, 2025 by Yann-Ray KAMANOU TAWAMBA

In this article, Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025)

Cameroon’s real estate sector is experiencing notable growth, driven by rapid urbanization and a burgeoning population. The residential real estate market is projected to expand by 4.99% annually from 2025 to 2029, reaching a market volume of approximately US$354 billion by 2029. Major cities like Douala and Yaoundé are at the forefront of this expansion, with real estate transactions increasing by 8% year-over-year in 2024.

Map of Cameroon.

Source: The author.

Trends in the Market

Urbanization is a significant trend shaping Cameroon’s real estate landscape. With an urbanization rate of 56.5% in 2023, the demand for housing in metropolitan areas is surging. The housing deficit in Cameroon is estimated at more than 2.5 million units, indicating a strong need for investment in both affordable and high-end residential properties. Rising land prices in prime areas such as Bonanjo (Douala) and Bastos (Yaoundé) have further driven the expansion of real estate development projects.

It is quite hard to find a liable chart online about real estate prices in Cameroon as many information, data are not documented at all. However, what I can say it’s that as of February 2025, the average monthly rent for a one-bedroom apartment in the city center (of Yaounde or Douala) is approximately 456,188 CFA francs, while outside the city center, it’s around 287,722 CFA francs.

Local Special Circumstances

Despite its positive growth trajectory, the market faces challenges such as a shortage of affordable housing, with over 60% of urban dwellers living in informal settlement. This scarcity presents opportunities for developers to invest in housing projects tailored to the middle-income segment. Additionally, Cameroon’s relative political stability compared to neighboring countries has bolstered investor confidence, making it an attractive destination for real estate investments. Notably, foreign direct investment (FDI) in real estate has grown by 12% annually since 2020, reflecting increasing trust in the sector.

Why should I be interested in this post?

This post provides a data-driven analysis of the growing Cameroonian real estate market, highlighting key investment opportunities and economic trends. The post explores essential financial concepts such as real estate financing, foreign direct investment (FDI), and mortgage-backed securities, all of which are relevant to careers in banking, asset management, and investment advisory. Understanding these dynamics can help students identify potential career opportunities in emerging markets, real estate funds, and financial institutions looking to expand in Africa.

Useful resources

Satista Real Estate – Cameroon

The African Investor 14 statistics for the Cameroon real estate market in 2025 https://www.numbeo.com/property-investment/country_result.jsp?country=Cameroon&utm_source

About the author

The article was written in February 2025 by Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025).

Gini index

March 3, 2025February 24, 2025 by Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) delves into the Gini Index, provides a comprehensive overview of the Gini Index, explaining its calculation, interpretation, and significance in understanding income inequality.

Introduction

In the world of economics and finance, understanding inequality and concentration is crucial for making informed decisions. Whether you’re an investment analyst assessing market dynamics, a wealth advisor guiding clients through portfolio diversification, or a finance student delving into the intricacies of econometrics, the Gini Index is an indispensable tool in your analytical arsenal.

But what exactly is the Gini Index, and why does it matter to finance professionals? Buckle up, because we’re about to embark on a journey through the fascinating world of income inequality measurement!

The Birth of a Revolutionary Concept

Picture this: It’s 1912, and an Italian statistician named Corrado Gini is burning the midnight oil, pondering the complexities of wealth distribution. Little did he know that his work would lead to the creation of one of the most widely used measures of inequality in the world.

The Gini Index, also known as the Gini Coefficient, was born out of Gini’s desire to quantify the disparity in wealth distribution across populations. It’s a testament to human ingenuity that a single number could encapsulate such a complex socio-economic concept.

Cracking the Code: Understanding the Gini Formula

At the core, the Gini Index is a mathematical marvel. But let’s break it down so that every mathematically inclined and non-inclined person understands it:

Perfect Equality Line: A diagonal line from (0,0) to (1,1) represents perfect equality – where everyone has the same income or wealth.
The Lorenz Curve: Imagine a graph where the x-axis represents the cumulative percentage of the population, and the y-axis represents the cumulative percentage of income or wealth. In a perfectly equal society, this would be a straight 45-degree line. In reality, it curves below this line, and the more it curves, the higher the inequality.
The Gini Coefficient: It’s the area between the Lorenz Curve and the Perfect Equality Line, divided by the total area under the Perfect Equality Line. It ranges from 0 (perfect equality) to 1 (perfect inequality). In other words, if everyone had exactly the same income, the Gini would be 0. If one person had all the income and everyone else had none, the Gini would be 1.

Gini Index coefficient in case of maximum equality
Gini Index co-efficient in case of maximum equality
Source: The author

Gini Index coefficient in case of maximum inequality
Gini Index co-efficient in case of maximum inequality
Source: The author

Gini Index coefficient in case of inequality
Gini Index co-efficient in case of inequality
Source: The author

The below Excel file contains the Gini Index illustration in all the three cases namely, maximum equality, maximum inequality and inequality. For more clear information please download the attached Excel file.

At its core, the Gini Index is elegantly simple yet profoundly insightful. It’s represented by a single number between 0 and 1, where:

0 represents perfect equality (everyone has the same income)
1 represents perfect inequality (one person has all the income)

The mathematical formula is based on the Lorenz curve, which plots the cumulative share of income against the cumulative share of the population.

Formula of Gini coefficient
Formula of Gini Co-efficient

Where:

A is the area between the line of perfect equality and the Lorenz curve
B is the area under the Lorenz curve

Applying the Gini Index in Financial Analysis

There are multiple applications of the Gini Index, but in this article let’s discuss a bit more on how it’s used in Income Inequality Analysis and Market Concentration Assessment.

Income Inequality Analysis

Imagine you’re an investment analyst tasked with evaluating the economic stability of different countries for potential investments. The Gini Index becomes your compass. Understanding income inequality can help you to:

Contextualize your clients’ wealth positions
Identify potential social and political risks to their investments
Guide philanthropic efforts for those interested in addressing inequality

Case Study: In 2022, the U.S. had a Gini coefficient of 0.488. What does this mean for your clients? It suggests a significant wealth gap, potentially indicating social tensions that could affect investment strategies.

Money Income Gini Index and Real Household Income at selected Percentiles from 1993 to 2022

Source: United States Census Bureau

Market Concentration Assessment

For investment analysts, the Gini Index isn’t just about personal incomes. It’s a powerful tool for assessing market dynamics: understanding market concentration can help you:

Evaluate industry competitiveness
Identify potential monopolistic trends
Assess risk in sector-specific investments

Conclusion

The Gini index serves as a crucial tool for understanding and measuring income inequality within a society (individuals, firms, etc.). By quantifying the disparity in income distribution, it provides policymakers, economists, and researchers with valuable insights for developing strategies to promote greater economic equity and social well-being.

Why should I be interested in this post?

The Gini index provides a crucial lens for finance professionals to understand the broader economic and social context within which financial markets operate. By incorporating insights from income inequality analysis, they can make more informed investment decisions, contribute to a more sustainable financial system, and play a role in promoting a more equitable and prosperous society.

Useful resources

Gini, C. (1912). Variabilità e mutabilità (Variability and Mutability). C. Cuppini, Bologna.

Wikipedia Gini coefficient

United states Census bureau Gini Index

Our world in data Measuring inequality: what is the Gini coefficient?

US Census Bureau Income Inequality Down Due to Drops in Real Incomes at the Middle and Top, But Post-Tax Income Estimates Tell a Different Story

Tommorow One How the Gini coefficient measures inequality

About the author

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

US Treasury Bonds

February 24, 2025 by Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) gives a comprehensive overview of U.S. Treasury bonds, covering their features, benefits, risks, and how to invest in them

Introduction

Treasury bonds, often referred to as T-bonds, are long-term debt securities issued by the U.S. Department of the Treasury. They are regarded as one of the safest investments globally, offering a fixed interest rate and full backing by the U.S. government. This article aims to provide an in-depth understanding of Treasury bonds, from their basics to advanced concepts, making it an essential read for finance students and professionals.

What Are Treasury Bonds?

Treasury bonds are government debt instruments with maturities ranging from 10 to 30 years. Investors receive semi-annual interest payments and are repaid the principal amount upon maturity. Due to their low risk, Treasury bonds are a popular choice for conservative investors and serve as a benchmark for other interest-bearing securities.

Types of Treasury Securities

Treasury bonds are part of a broader category of U.S. Treasury securities, which include:

Treasury Bills (T-bills): Short-term securities with maturities of one year or less, sold at a discount and matured at face value.
Treasury Notes (T-notes): Medium-term securities with maturities between 2 and 10 years, offering fixed interest payments.
Treasury Inflation-Protected Securities (TIPS): Securities adjusted for inflation to protect investors’ purchasing power.
Treasury Bonds (T-bonds): Long-term securities with maturities of up to 30 years, ideal for investors seeking stable, long-term income.

Historical Performance of Treasury Bonds

Historically, Treasury bonds have been a cornerstone of risk-averse portfolios. During periods of economic uncertainty, they act as a haven, preserving capital and providing reliable income. For instance, during the 2008 financial crisis and the COVID-19 pandemic, Treasury bond yields dropped significantly as investors flocked to their safety.

Despite their stability, T-bonds are sensitive to interest rate fluctuations. When interest rates rise, bond prices typically fall, and vice versa. Over the long term, they have delivered modest returns compared to equities but excel in capital preservation.

Investing in Treasury Bonds

Investing in Treasury bonds can be done through various channels like Direct Purchase, Brokerage Accounts, Mutual Funds and ETFs, and Retirement Accounts:

Direct Purchase: Investors can buy T-bonds directly from the U.S. Treasury via the TreasuryDirect website.
Brokerage Accounts: Treasury bonds are also available on secondary markets through brokers.
Mutual Funds and ETFs: Investors can gain exposure to Treasury bonds through funds that focus on government securities.
Retirement Accounts: T-bonds are often included in 401(k) plans and IRAs for diversification.

Factors Affecting Treasury Bond Prices

Several factors influence the prices and yields of Treasury bonds such as Interest Rates, Inflation Expectations, Federal Reserve Policy, and Economic Conditions:

Interest Rates: An inverse relationship exists between bond prices and interest rates.
Inflation Expectations: Higher inflation erodes the real return on bonds, causing prices to drop.
Federal Reserve Policy: The Federal Reserve’s actions, such as changing the federal funds rate or engaging in quantitative easing, directly impact Treasury yields.
Economic Conditions: In times of economic turmoil, demand for Treasury bonds increases, driving up prices and lowering yields.

Relationship between bond price and current bond yield

Let us consider a US Treasury bond with nominal value M, coupon C, maturity T, and interests paid twice a year every semester. The coupon (or interest paid every period) is computed with the coupon rate. The nominal value is reimbursed at maturity. The current yield is the market rate, which may be lower or greater than the rate at the time of issuance of the bond (the coupon rate used to compute the dollar value of the coupon). The formula below gives the formula for the price of the bond (we consider a date just after the issuance date and different yield rates.

Formula for the price of the bond

Source: Treasury Direct

Relationship between bond price and current bond yield

Source: Treasury Direct

Risks and Considerations

While Treasury bonds are low-risk investments, they are not entirely risk-free, there are several factors to consider, such as Interest Rate Risk (Rising interest rates can lead to capital losses for bondholders), Inflation Risk (Fixed payments lose purchasing power during high inflation periods), Opportunity Cost (Low returns on T-bonds may be less attractive compared to higher-yielding investments like stocks).

Treasury Bond Futures

Treasury bond futures are standardized contracts that allow investors to speculate on or hedge against future changes in bond prices. These derivatives are traded on exchanges like the Chicago Mercantile Exchange (CME) and are essential tools for managing interest rate risk in sophisticated portfolios.

Treasury Bonds in the Global Market

The U.S. Treasury market is the largest and most liquid government bond market worldwide. It plays a pivotal role in the global financial system:

Reserve Currency: Many central banks hold U.S. Treasury bonds as a key component of their foreign exchange reserves.
Benchmark for Other Securities: Treasury yields serve as a reference point for pricing other debt instruments.
Foreign Investment: Countries like China and Japan are significant holders of U.S. Treasury bonds, underscoring their global importance.

Conclusion

Treasury bonds are fundamental to the financial landscape, offering safety, stability, and insights into broader economic dynamics. Whether you’re a finance student building foundational knowledge or a professional refining investment strategies, understanding Treasury bonds is indispensable. As of 2023, the U.S. Treasury market exceeds $24 trillion in outstanding debt, reflecting its vast scale and importance. By mastering the nuances of Treasury bonds, you gain a competitive edge in navigating the complexities of global finance.

Why should I be interested in this post?

Understanding Treasury bonds is crucial for anyone pursuing a career in finance. These instruments provide insights into Monetary Policy, Fixed-Income Analysis, Portfolio Management, and Macroeconomic Indicators.

Useful resources

Treasury Direct Treasury Bonds

Fiscal data U.S. Treasury Monthly Statement of the Public Debt (MSPD)

Treasury Direct Understanding Pricing and Interest Rates

Wikipedia United States Treasury security

About the author

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

Berkshire Hathaway

February 24, 2025 by Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) gives an overview about Berkshire Hathaway, starting from its history to its investment strategies, financial analysis of the company and its future outlook.

Introduction

Berkshire Hathaway is one of the most iconic and highly regarded companies in the world. Led by Warren Buffett, often referred to as the “Oracle of Omaha,” it is synonymous with long-term investment success and financial acumen. This article delves into the origins, business model, and strategic philosophy of Berkshire Hathaway, providing a robust understanding tailored for finance students and professionals.

Logo of Berkshire Hathaway

Source: 1000 logos

History

Berkshire Hathaway traces its roots back to two textile companies, Berkshire Fine Spinning Associates and Hathaway Manufacturing, which merged in 1955. Originally a struggling textile firm, it caught the attention of Warren Buffett in 1962. Buffett initially invested in Berkshire for its undervalued stock price but soon pivoted the company’s focus toward investing in other businesses. Under his leadership, Berkshire Hathaway became a multinational conglomerate, abandoning textiles entirely by the mid-1980s. Charlie Munger is a renowned American investor, businessman, and philanthropist who served as the vice chairman of Berkshire Hathaway for decades. was also a close friend and business partner of Warren Buffett, and together they built Berkshire Hathaway into one of the most successful companies in the world.

Warren Buffet and Charlie Munger

Source: Hindustan Times

Company Overview

Berkshire Hathaway is headquartered in Omaha, Nebraska, and is a holding company with diverse business interests. It owns a mix of wholly owned subsidiaries and significant minority stakes in publicly traded companies. As of recent years, Berkshire is one of the largest companies globally by market capitalization, with Class A shares trading at $745,303 per share, dated 24th February 2025, a testament to its consistent growth and profitability.

Berkshire hathaway class A share price

Source: Yahoo

Business Segments

Berkshire Hathaway operates across a wide range of industries, making it a textbook example of diversification. The major business segments include:

Insurance: The cornerstone of Berkshire’s operations, this segment includes GEICO, Berkshire Hathaway Reinsurance, and General Re. These businesses provide a significant source of “float,” or upfront premium payments, that Berkshire uses for investments.
Utilities and Energy: Berkshire Hathaway Energy manages electricity and natural gas utilities, renewable energy projects, and energy infrastructure across the United States and abroad.
Manufacturing, Service, and Retail: Subsidiaries such as Precision Castparts, Duracell, and Brooks Sports fall under this category, showcasing Berkshire’s hands-on involvement in consumer and industrial goods.
Railroad: BNSF Railway, one of the largest freight rail networks in North America, is a wholly owned subsidiary.
Investments in Public Companies: Berkshire holds substantial equity stakes in companies like Apple, Coca-Cola, American Express, and Bank of America, demonstrating its preference for blue-chip stocks.

Investment Strategy and Philosophy

Berkshire Hathaway’s investment strategy is underpinned by value investing principles championed by Benjamin Graham, Buffett’s mentor. Key aspects include:

Focus on Intrinsic Value: Berkshire seeks companies trading below their intrinsic value, as determined by rigorous analysis of cash flows and assets.
Long-Term Horizon: Unlike traders aiming for short-term gains, Berkshire prioritizes investments that can yield substantial returns over decades.
High-Quality Businesses: Buffett often invests in companies with strong competitive advantages (economic moats), robust management, and predictable cash flows.
Conservative Use of Debt: The company’s cautious approach to leverage ensures financial stability, even during market downturns.

Financial Performance and Analysis

Berkshire Hathaway’s financial performance is closely scrutinized due to its unique structure and Buffett’s reputation. Some critical metrics include:

Book Value Per Share: Historically, this measure has been used to gauge the company’s intrinsic worth.
Operating Earnings: This highlights the profitability of Berkshire’s subsidiaries.
Investment Portfolio Performance: The returns from its equity holdings and fixed-income securities significantly contribute to overall earnings.

Berkshire’s annual shareholder letters, penned by Buffett, are a treasure trove of insights, blending financial results with timeless investing wisdom.

Future Outlook and Challenges

While Berkshire Hathaway remains a formidable entity, it faces challenges:

Succession Planning: As Warren Buffett and Vice Chairman Charlie Munger age, questions about leadership continuity loom large. Buffett has named Greg Abel, a senior executive, as his successor.
Capital Deployment: Berkshire’s massive cash reserves, often exceeding $100 billion, can be both an asset and a liability. Finding suitable investment opportunities at scale remains challenging.
Market Dynamics: As Berkshire grows, maintaining its historical rate of return becomes increasingly difficult due to the sheer size of its asset base.

Conclusion

Berkshire Hathaway stands as a masterclass in disciplined investing and business management. Its journey from a failing textile mill to a global conglomerate is a testament to the power of sound financial principles, patience, and vision.

Why should I be interested in this post?

For finance students and professionals, studying Berkshire Hathaway offers invaluable lessons in diversification, risk management, and the nuances of value investing.

Useful resources

Berkshire Hathaway

Wikipedia Berkshire Hathaway

Yahoo! Finance Berkshire Hathaway Inc. (BRK-A)

About the author

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

Understanding the Discount Rate: A Key Concept in Finance

February 12, 2025February 7, 2025 by Yann-Ray KAMANOU TAWAMBA

In this article, Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025) explains the discount rate, which is a key concept in finance.

About the Discount Rate

The discount rate is a fundamental concept in finance, playing a crucial role in investment valuation, corporate finance, and monetary policy. It represents the interest rate used to determine the present value of future cash flows, making it essential for evaluating investment opportunities and financial decision-making. The discount rate is widely applied in areas such as capital budgeting, bond pricing, and central banking policy, making it a critical concept for students and professionals in finance.

The discount rate is a fundamental concept in finance, used in both monetary policy and investment valuation. In central banking, it represents the interest rate at which commercial banks borrow from the central bank, influencing economic activity and inflation. In corporate finance, it is used to discount future cash flows in investment valuation, often calculated using the Weighted Average Cost of Capital (WACC) or the Capital Asset Pricing Model (CAPM). It reflects the opportunity cost of capittal, risk, and expected returns, playing a crucial role in decision-making for investors, businesses, and policymakers.

The Discount Rate in Investment Analysis

One of the most common applications of the discount rate is in the Discounted Cash Flow (DCF) model, which is used to assess the intrinsic value of an investment. In this method, future cash flows are discounted to the present using an appropriate discount rate. The formula for present value (PV) and net present value (NPV) of future cash flows is:

PV formula of cash flows

NPV formula of cash flows

Where CF represents the expectation of the future cash flow, r is the discount rate, and T is the number of periods. If the NPV of an investment is positive, it indicates that the project is expected to generate more value than its cost, making it a viable option.

The discount rate affects bond prices and yields. When it rises, borrowing becomes expensive. New bonds offer higher yields, making them more attractive. Older bonds with lower fixed rates lose value. Investors use the discount rate to calculate the present value of a bond’s future payments:

Central banks, like the Federal Reserve in the US and the European Central Bank in the Eurozone, set the discount rate as the interest rate for banks borrowing directly from them. When central banks increase the discount rate, loans become expensive. Banks lend less, slowing inflation and economic growth. When they lower the discount rate, borrowing is cheaper. Banks lend more, encouraging spending and investment.

Why should I be interested in this post?

Understanding the discount rate is essential. Whether you are aiming for roles in investment banking, asset management, financial consulting, or central banking, a solid grasp of this concept will allow you to make informed financial decisions. This topic is particularly relevant for students preparing for financial modeling exercises, valuation case studies, and investment strategy planning.

Useful resources

Berk, J. B., & van Binsbergen, J. H. (2017) How Do Investors Compute the Discount Rate? They Use the CAPM Financial Analysts Journal 73(2), 25–32.

Hirshleifer, J. (1961) Risk, The Discount Rate, and Investment Decisions, The American Economic Review, 51 (2), 112-120.

Roley, V. V., & Troll, R. (1984) The impact of discount rate changes on market interest rates. University of Washington. Center for the Study of Banking and Financial Markets, Graduate School of Business Administration.

Woon, G.C. (1999) Estimating the discount rate policy reaction function of the monetary authority, Journal of Applied Econometrics, 14(4), 379-401.

About the author

The article was written in February 2025 by Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025).

My internship experience at Natixis

February 7, 2025 by Yann-Ray KAMANOU TAWAMBA

In this article, Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025) shares his experience as an intern in the Primary Market team within the Global Securities Settlement division at Natixis.

About the company

Natixis is a French corporate and investment bank that provides financial services to corporations, institutional investors, and financial institutions employing in total over 105,000 collaborators. It operates in various fields, including asset and wealth management, insurance, and corporate and investment banking. As of December 31, 2024, Groupe BPCE reported total assets amounting to €1.531 trillion. Within Natixis, the Global Securities Settlement division plays a crucial role in ensuring the proper execution of financial transactions. More specifically, the Primary Market team is responsible for overseeing bond issuances and ensuring smooth settlement processes across different markets.

Logo of Natixis.

Source: Natixis

My internship

As part of my internship, I joined the Primary Market team within the Global Securities Settlement division at Natixis. This experience allowed me to gain insight into the mechanisms of financial markets, particularly in bond issuance and post-trade processes. My role mainly involved monitoring Natixis’ bond issuances as well as third-party medium-to-long-term accounts, ensuring the correct execution of financial transactions, and liaising with internal and external stakeholders to resolve potential discrepancies. Working in such a dynamic environment provided me with a better understanding of how financial institutions operate and reinforced my ability to analyze complex financial transactions.

My missions

During my internship, I was entrusted with several responsibilities that allowed me to develop a thorough understanding of financial market operations. One of my primary tasks was to ensure the compliance of legal documentation related to bond issuances, ensuring that all required documents met regulatory standards. I was also involved in validating and confirming transactions within internal systems, ensuring accuracy before settlement. A key aspect of my role was monitoring the settlement and delivery of transactions across multiple financial markets, including Euroclear and domestic markets in Italy, Spain, and the United States. When discrepancies arose, I had to liaise with counterparties, depositories, and paying agents to identify the source of the issue and propose an appropriate resolution. Additionally, I was responsible for reporting any problems to the relevant teams, such as the middle office, front office, legal, and accounting departments, ensuring that any operational risks were promptly addressed. My daily tasks also included reconciling internal and external records to track settlement suspensions and following corporate actions that could impact securities. To ensure efficient reporting and decision-making, I contributed to the preparation of activity reports that summarized key transactions and market developments.

Required skills and knowledge

To succeed in this role, a solid foundation in financial markets and regulatory compliance was essential. Given the nature of the work, good analytical skills were required to identify and resolve settlement discrepancies efficiently. Attention to detail was crucial, as any error in transaction processing could have significant financial and operational consequences. Effective communication was also an important skill, as I frequently interacted with internal teams and external stakeholders to coordinate operations. Additionally, working in such a fast-paced environment required adaptability and the ability to manage multiple tasks simultaneously. Technical proficiency in financial systems was also beneficial, as it allowed me to process transactions accurately and extract relevant data for reporting purposes.

What I learned

This internship at Natixis was an enriching experience that provided me with valuable insights into the functioning of financial markets and the post-trade environment. One of the key takeaways from this experience was the importance of precision in financial operations—any inaccuracy in trade processing could lead to costly settlement failures. I also became aware of the complexity of regulatory frameworks, as each financial market has its own set of rules that must be strictly followed. Moreover, I realized how essential collaboration is in a banking environment, as different departments must work together to ensure seamless transaction execution. Lastly, I learned that financial markets are constantly evolving, requiring professionals to stay up to date with new regulations and market trends.

Financial concepts related my internship

Liquidity management

This is especially relevant, as ensuring the timely and seamless settlement of transactions plays a vital role in maintaining market efficiency, preventing disruptions, and fostering overall financial stability.

Counterparty risk

It plays a crucial role in financial operations, as each transaction involves multiple parties whose creditworthiness and reliability must be carefully assessed to mitigate potential counterparty risk and ensure smooth market functioning.

Clearing and settlement mechanisms

It provided valuable insights into how financial transactions are finalized, highlighting the critical role of clearing and settlement mechanisms in reducing settlement risk and ensuring the smooth functioning of financial markets.

Why should I be interested in this post?

This post provides a first-hand look at the responsibilities and skills required for a role in securities settlement and bond issuance within a major investment bank. The internship at Natixis offers insight into key financial operations, such as trade settlement, regulatory compliance, and risk management—critical areas for careers in banking and capital markets. Additionally, the experience highlights the importance of analytical thinking, problem-solving, and collaboration in a dynamic financial environment, all of which are essential for aspiring finance professionals looking to enter similar roles in global institutions.

Useful resources

Natixis

Natixis Key information for shareholders

Natixis Full-year 2024 and Q4-24 results of Groupe BPCE

About the author

The article was written in February 2025 by Yann-Ray KAMANOU TAWAMBA (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2024-2025).

About the company

My internship

My missions

Required skills and knowledge

What I learned

Financial concepts related my internship

Customer Lifetime Value (CLV)

Return on Investment (ROI) for Campaigns

Subscription-Based Revenue Models

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

About the author

About the company

My internship

My missions

Required skills and knowledge

What I learned

Financial concepts related my internship

Project Cost Awareness

Resource Utilization

Consulting Business Models

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

About the author

Introduction to Capital Structure

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

M&M 1958 Proposition I: Capital Structure Irrelevance

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

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

Takeaways on Optimal Debt Structure and Bankruptcy Costs from M&M 1958 Propositions

Why Should I Be Interested in This Post?

Related posts on the SimTrade blog

Useful resources

About the author

Introduction to Solvency and Insolvency

Key Indicators of Solvency

Solvency Ratios

Cash Flow Analysis

Balance Sheet Strength

Types of Insolvency

Cash Flow Insolvency

Balance Sheet Insolvency

Causes of Insolvency

Consequences of Insolvency

Preventing Insolvency

Importance of Financial Forecasting and Stress Testing

Effective Debt Management Strategies

Building Strong Liquidity Buffers

Why Should I Be Interested in This Post?

Related posts on the SimTrade blog

Useful resources

About the author

Introduction to Liquidity and Illiquidity

Liquidity and Illiquidity Definitions

Causes of Illiquidity

Measuring Liquidity

Key Liquidity Metrics

Funding Liquidity

Consequences of Illiquidity

Liquidity Management for Companies

Tools for Liquidity Management

Building Strong Liquidity Buffers

Why Should I Be Interested in This Post?

Related posts on the SimTrade blog

Useful resources

About the author

About Bank of America

My work

Transaction Management & Documentation

Coordination with Internal and External Stakeholders

Funding & Settlement Oversight

Recordkeeping & Compliance

Fee and Payment Management

Required skills and knowledge

Technical Skills

Desirable Soft Skills

What I learned

Financial concepts related to my job