MILAN (AP) -- All that is golden in bank Credito Emiliano's temperature-controlled vault is not precious metal, but something equally prized in Italy: aging Parmesan cheese.
Row upon row of 39-kilogram (85-pound) wheels of straw-colored Parmesan cheese, stacked some 10 meters (33 feet) high at a secure warehouse, age for as many as two years under the care of bank employees trained in the centuries-old art of Parmesan making.
The program allows Parmesan producers to pump cash into their business by using their product as collateral while it is otherwise sitting on a shelf for the long aging process. While the mechanism was not born out of the current economic crisis, dating rather from Italy's post-World War II years, producers say it is ever more important because it ensures that credit keeps flowing during otherwise tight times.
"In times of crisis, the system is helping the cheesemakers," said Iginio Morini, spokesman for the Parmigiano-Reggiano Cheese Consortium, which represents more than 400 Parmesan producers who are the only ones who may name their cheese "Parmigiano-Reggiano."
A cheesemaker turns over a percentage of his production, say 25 percent, to a bank warehouse, and is given a certificate which can be presented to the bank to secure the loan, Morini said. In many cases, the cheesemaker then sells title to the cheese to a distributor while the cheese is still aging.
"An advance payment, as the one offered from Credem (Credito Emiliano) is a really positive thing because it gives at least the chance of surviving the lapse of time, hoping that the market will recover in a short period of time," said Cristian Bertolini, a quality check expert for the consortium.
Typically, a Parmesan maker who produces 7,000 wheels a year might put up 2,000 as collateral for a loan. According to Morini's calculations, each wheel is worth as much as euro300 ($425), valuing the cheese collateral at euro600,000. The bank would then issue a loan of 60 percent to 70 percent of the value, so around euro420,000.
The Parmesan loan business contributes just 1 percent to the bank's annual revenue -- but is critical to its image in the region, where agriculture is a key economic driver, said William Bizzarri, director of the Credito Emiliano subsidiary that deals in Parmesan deposits.
Bizzarri said Parmesan deposits are up about 10 percent due to the recession. At capacity, the cheesy deposits are worth from euro120 million to euro130 million.
Inside the vaults, the temperature is maintained at between 18-20 degrees Celsius (64-68 degrees Fahrenheit) with humidity above 90 percent. The forms are rotated and cleaned automatically by machines.
Parmesan wheels lend themselves well to use as collateral because they are eminently traceable. Each form is stamped with the month and location where it was produced, and after 12 months of aging it earns the Parmesan imprint, although some varieties are aged for up to 24 and even 30 months.
Those markings helped identify 570 Parmesan wheels stolen six months ago, Bizzarri said.
Saturday, August 22, 2009
CDS-Linked Corporate Credit Lines
CDS-Linked Corporate Credit Lines
Some of Wall Street's latest innovations give reason for pause. Consider a trend in business loans. Lenders typically tie corporate credit lines to short-term interest rates. But now Citi, JPMorgan Chase, and BofA, among others, are linking credit lines both to short-term rates and credit default swaps (CDSs), the volatile and complicated derivatives that are supposed to act as "insurance" by paying off the owners if a company defaults on its debt. JPMorgan, BofA, and Citi declined to comment.
In these new arrangements, when the price of the CDS rises -- generally a sign the market thinks the company's health is deteriorating -- the cost of the loan increases, too. The result: The weaker the company, the higher the interest rates it must pay, which hurts the company further.
The lenders stress that the new products give them extra protection against default. But for companies, the opposite may be true. Managers now must deal with two layers of volatility -- both short-term interest rates and credit default swaps, whose prices can spike for reasons outside their control.
Making matters more difficult for corporate borrowers: high fees. Banks are raising their rates for credit lines across the board -- but the new CDS-based credit lines cost far more than the old lines. FedEx (FDX) could end up paying $1.9 million to $3.6 million a month if it decides to tap a new line from JPMorgan and Bank of America. On its previous line with JPMorgan, FedEx would have paid about $540,000.
Some of Wall Street's latest innovations give reason for pause. Consider a trend in business loans. Lenders typically tie corporate credit lines to short-term interest rates. But now Citi, JPMorgan Chase, and BofA, among others, are linking credit lines both to short-term rates and credit default swaps (CDSs), the volatile and complicated derivatives that are supposed to act as "insurance" by paying off the owners if a company defaults on its debt. JPMorgan, BofA, and Citi declined to comment.
In these new arrangements, when the price of the CDS rises -- generally a sign the market thinks the company's health is deteriorating -- the cost of the loan increases, too. The result: The weaker the company, the higher the interest rates it must pay, which hurts the company further.
The lenders stress that the new products give them extra protection against default. But for companies, the opposite may be true. Managers now must deal with two layers of volatility -- both short-term interest rates and credit default swaps, whose prices can spike for reasons outside their control.
Making matters more difficult for corporate borrowers: high fees. Banks are raising their rates for credit lines across the board -- but the new CDS-based credit lines cost far more than the old lines. FedEx (FDX) could end up paying $1.9 million to $3.6 million a month if it decides to tap a new line from JPMorgan and Bank of America. On its previous line with JPMorgan, FedEx would have paid about $540,000.
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