“Further advances”

Many will be familiar with the words further advances and associate this term with typical boiler plate provisions in finance documents.

In a recent case(In the matter of Black Ant Co Ltd (in administration) [2014] EWHC 1161 (Ch)(15 April 2014)the High Court provided useful commentary on the meaning of further advances in the context of the priority of security.

The priority of security is important where a borrower is insolvent and enforcement proceeds are insufficient to dischargeits total debt. Many lenders will require a formal deed of priority or an intercreditor deed be entered into by a borrower with all of their secured lenders, in order to specify the level of priority of each lender in relation to repayment and enforcement proceeds. In the absence of any such document, the rules of the Land Registration Act 2002 will apply and debts owed to secured lenders are repaid in the order of priority of their security over real estate.

A first lender will be concerned that its security retains its priority for subsequent advances made after its borrower grants security to other creditors. Tacking is the ability of a lender to secure (tack) further advances under its security which rank ahead of any amounts subsequently lent by, and secured in favour of, another creditor.

The Land Registration Act 2002 contains anti-tacking provisions which limit the priority of a first registered charge to advances made at the time of that charge and any further advances that the lender was obliged (under the terms of the charge) to make. An obligation to make such further advances must be recorded on the register at the Land Registry.

The facts of this recent case involved the common scenario where a lender and borrower have entered into a replacement facility agreement. In the circumstances, the lender and borrower could have alternatively entered into an amendment (or an amendment and restatement) of its existing facility agreement and no additional quantum of debt was made available. One of the points to be decided was whether this replacement facility constituted a further advance. The High Court decided that a further advance is an advance offurther or additional funds, and that in these circumstances, as the new facility could not be considered to involve the deemed repayment of the previous facility by way of new additional funds, the replacement facility did not constitute a further advance.

Are Americans filling up on too much debt?

Americans love cars and debt, so its only natural that they would combine the two. A new report finds that auto loans are becoming more supercharged than ever as financing terms reach record highs. However, consumers should remember to steer clear of buying more car than they can really afford.

The average auto-loan term increased to 66 months during the first quarter, according to Experian Automotive, a global information services company. That is the highest level since Experian began publicly reporting the data in 2006.

Making matters worse, nearly 25% of all new vehicle loans originated during the quarter had terms extending out 73 months to 84 months, representing a 27.6% surge from a year earlier. The average amount financed for a new vehicle loan also reached an all time high of $27,612.

As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level, said Melinda Zabritski, Experian Automotives senior director of automotive credit. The benefit of a longer-term loan is the lower monthly payment; however, the flip side of that is consumers can find themselves paying more in interest or being upside-down on their loan if they seek to trade their vehicle in early. It is definitely a choice that consumers will want to weigh carefully before making a final purchasing decision.

The average monthly payment for a new vehicle loan hit a record high of $474 in the first-quarter, driving more buyers to leases. Of all new vehicles financed, 30.2% were leased compared to 27.5% a year earlier.

Over the past several quarters, leasing has come back as a very desirable option for consumers, said Zabritski. Whether they are interested in getting the latest and greatest models or simply do not want to commit to a long-term purchase, consumers are leasing new vehicles in greater numbers than ever before.

While leasing a car may sound like a good idea at first, most financial advisers agree that purchasing a car is typically the wiser move in the long run.

When you lease a car, you never truly own it and will always be saddled with a monthly payment. It can also be difficult to get out of a lease if a financial emergency arises. On the other hand, when you purchase a car, you can build equity and keep the car well beyond the length of the loan, enjoying years of no monthly payments.

Since the price of a brand new light vehicle is about $32,000, car buyers should set some rules for themselves. There are many guidelines for how much drivers should spend on a vehicle, but one common strategy is the 20/4/10 rule. This means that people should put down at least 20%, finance it for no longer than four years and not let total monthly vehicle expenses (including principal, interest, and insurance) exceed 10% of gross income. If the only way you can purchase a car is through a 6- or 7-year loan, you cant really afford it.

Abiding by these rules may mean shopping for used cars instead of new ones, but it will help you escape the pitfalls of debt. If you really want to be conservative with your car buying habits, restrict yourself to only paying cash and keep the vehicle for at least five years.

MORE: The 20 fastest cars that can be yours for less than $30K

MORE: The 10 most stolen and recovered cars in the USA

MORE: Top 10 beach town housing markets in America

Wall St. Cheat Sheet is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.

Greenpeace Foundation rejects Intelligence Bureau’s allegations

New Delhi, June 11 (ANI): The Greenpeace Foundation on Wednesday refuted allegations of negatively impacting the economic growth of the country, leveled by the Intelligence Bureau (IB) in its report submitted to the Prime Ministers Office (PMO).

Bharti Sinha, Communications Director of
Greenpeace Foundation, said, Greenpeace has been active in this country for the past ten years. It has supported and fought for the people whose voices have been subdued.

As far as IB is concerned, it is a very respectable organization and is carrying out some important functions. We have respect for them and their work. But in this particular matter, we think that they have drawn a wrong conclusion, and we disagree with it. We dont know about the instances and evidences on which their conclusion is based, but we are ready to engage with the government on this matter, Sinha added.

She further said that Greenpeace has never targeted any specific corporations and can explain this point if given a chance by the government.

She also denied allegations that Greenpeace provided funds to AAP leader Pankaj Singh, and said that it is an apolitical organization.

We dont have any political ideology. We have our own values and the people working in this organization are free to enter politics if they want. But they have to resign from the organization. Pankaj Singh was our consultant, and he took a decision to enter politics, and afterwards he resigned from the organization, she said.

On the allegations of Greenpeace targeting energy and nuclear projects of the country, Sinha said, It is true that we are against nuclear energy. As other people tried to bring in a strong Nuclear Liability Law in this country, we had also made some efforts in the same direction. This law was eventually passed by the government. So, we went with the national mood. There is great danger from nuclear energy.

As far as thermal plants are concerned, we believe that the government should explore other options instead of coal. We are not against development. Development should take place, but not at the cost of future generations, Sinha added.

She asserted that Greenpeace does not take any funds from any corporate, and has always sustained itself on individual funding.

The IB, in its report dated June 3, has described the Greenpeace Organization as a threat to national economic security and has claimed that there could be negative implications of the NGOs role on GDP growth ranging from 2-3 per cent per annum.

The IB has also accused the NGO of funding Aam Aadmi Party (AAP) candidate Pankaj Singh in the Lok Sabha Elections, , and staging protest against nuclear and coal plants. It further accuses the NGO of being funded by some foreign activists visiting India. (ANI)

What Happens To Your Collateral During A Bankruptcy?

Lenders and their attorneys are conditioned to believe that
being over-secured is as good as life gets for a creditor. 
Lenders want to secure repayment with collateral that is valuable
and liquid, while their attorneys ensure that the security interest
is properly perfected.  But, post-closing confidence in a job
well done can quickly evaporate if the borrower files a bankruptcy
case intending to sell the collateral. 

Is it true that a debtor can sell collateral without the
lender#39;s consent?   Yes, under the Bankruptcy Code it
can be done ‒ even if the collateral is sold for less than
the amount of outstanding debt.  So, a secured creditor must
be proactive if a distressed borrower tries to sell the collateral
in a bankruptcy. 

How Can This Happen?

Section 363 of the Bankruptcy Code authorizes a bankrupt entity
to sell all, or part, of its assets.  Sales in the ordinary
course of business do not require bankruptcy court approval, while
sales outside the ordinary course require both a hearing and court

To determine whether a transaction is in the ordinary course of
business, bankruptcy judges usually apply one of two tests. 
The first is an objective standard, sometimes called the horizontal
test, which looks at the debtor#39;s industry to determine if the
sale is the type of transaction conducted by other businesses in
the ordinary course.  The other is a subjective test,
sometimes called the vertical test, which looks at the expectations
of creditors (ie, whether the transaction subjects creditors to
different economic risks from those which the creditor accepted and
could reasonably anticipate) when extending credit.  For
example, if the collateral is inventory, it can be sold in the
ordinary course on customary terms, in which case the resulting
proceeds of sale might constitute restricted cash collateral (but,
that is an issue for a different article).  However, if the
debtor proposes a bulk sale of a substantial portion of its
inventory, that transaction would be outside the ordinary course of

On the other hand, asset sales that are outside of the ordinary
course of business, including the sale of all or a significant
portion of a debtor#39;s assets, require notice to interested
parties and advance approval by the bankruptcy court.  In
considering a proposed sale transaction, bankruptcy courts
generally are concerned with (i) the process and (ii) the
result.  If a debtor conducts a fair and impartial sale
process, the courts usually defer to the debtor#39;s business
judgment in deciding whether to approve a sale.  Once the sale
is approved by the bankruptcy court, section 363(m) of the
Bankruptcy Code provides that any reversal or modification of the
sale approval will not affect the validity of the transfer. 
This forces a creditor who wants to appeal the bankruptcy
court#39;s decision to obtain a stay pending appeal.  If the
sale approval is not stayed, any appeal from the bankruptcy
court#39;s order will be moot.

Selling Free and Clear of Liens

One of the chief benefits of a bankruptcy sale is section 363(f)
of the Bankruptcy Code, which gives the debtor the ability to strip
liens from sale assets.  Debtors routinely use this statute to
sell their property free and clear of liens. 
Section 363(f) allows a debtor to sell property free and clear of
any third-party#39;s interest in such property if one of five
conditions can be satisfied:  (1) sale free and clear of the
interest is permissible under nonbankruptcy law; (2) the creditor
consents; (3) if the interest is a lien, the property is sold for a
price greater than the aggregate amount of all liens; (4) the
interest is in bona fide dispute; or (5) the third-party
could be compelled, in a legal or equitable proceeding, to
accept a money satisfaction of such interest. 

Under this provision, the debtor is able to sell an asset free
and clear of an undisputed lien only if the sale is at a price that
exceeds the amount of the lien.  This provides lenders with
relatively little protection, however, since the value of a lien
cannot exceed the value of the collateral (in other words, if the
claim is greater than the value of the perfected interest in the
collateral, the excess portion of the claim is unsecured). 
Unless the lender is able to demonstrate that the sale is at a
price below asset value, the debtor should be able to sell the
asset free and clear of the lender#39;s lien.

However, all is not lost since the Bankruptcy Code provides
lenders with some tools to protect their interests, including the
ability to bid up an inadequate sale price.

The Right to Credit Bid

To protect an interest in collateral that is offered for sale,
the Bankruptcy Code gives a creditor the right to credit
bid (ie, bid debt rather than cash) up to the full amount
of its claim. The threat of a lender#39;s credit bid is designed
to keep prospective bidders honest: a low ball offer could induce
the lender to enter into a bidding contest.  That assumes, of
course, that the secured creditor prefers to acquire the collateral
in exchange for cancellation of some, or all, of the debt. 
The lender might prefer this to a short sale if the lender can
achieve a greater return of value on the collateral than the
debtor.  But, lenders ordinarily do not want to own the
collateral.  The Bankruptcy Code does provide such lenders
with an alternative means of protecting their interests, although
the benefits are often illusory.

Requesting Adequate Protection

A secured creditor who is proactive can seek adequate
protection of its collateral interest.  Adequate
protection is a concept that is used, but not defined, in the
Bankruptcy Code.  It is almost universally accepted to require
that a debtor provide some economic protection for the secured
creditor#39;s interest in the collateral, pending the resolution
of the bankruptcy case.   Section 361 of the Bankruptcy
Code provides some examples what forms of protection might be
adequate.  In the context of a sale, one form of adequate
protection might be granting the creditor a replacement lien on the
sale proceeds.  This replacement lien must attach to the
proceeds in the same order and priority as the pre-sale interest in
the collateral to ensure that the lender receives the indubitable
equivalent of its pre-sale interest in the collateral. This takes
us full circle back to a free and clear sale under section 363(f)
and the issue of valuation, which was mentioned above.

What is My Collateral Worth?

Valuation has been characterized by some judges as nothing more
than guesstimating.  This is more than a tacit
admission that litigating valuation issues in a bankruptcy case can
be problematic for several reasons.  First, during the course
of a bankruptcy, there may be different reasons to value an asset
and the lender#39;s interest will vary, depending on the
circumstances.  In fact, section 506(a) of the Bankruptcy Code
acknowledges this vagary; it provides that value should be
determined in light of several factors, one of which is the purpose
of the valuation.   For example, a higher value may have
the salutary effect of increasing the amount of a secured claim,
while a lower value would better support a request for either
adequate protection or relief from the automatic stay.

Whatever the purpose, bankruptcy courts are accustomed to
adjudicating the value of assets.  Nevertheless, these issues
arise in contexts that are overlain with input from competing
constituencies that are distinct from the lender#39;s
concerns.  Moreover, circumstances often require a valuation
determination in a timeframe that makes it difficult to engage and
prepare the needed valuation experts.

For all of these reasons, the outcome of a valuation litigation
can be unpredictable.   One party will ask for a higher
valuation, the other will seek a lower valuation, and each will
offer evidence in support of its position.   As often as
not, the court comes up with a third value based upon its own
reasoning.   Simply put, valuation is unpredictable,
imprecise and discretionary.  But as demonstrated above, it is
vitally important to secured lenders, since it controls their
rights in bankruptcy and ultimately will affect their prospects for

Your Take-Away

Bankruptcy is a frustrating experience for lenders, even when
they are fully perfected.  When a borrower enters bankruptcy,
the lender#39;s ability to realize the full benefit of the
protections that are negotiated on the front-end of the transaction
will be put to the test.  To avoid being swept along, the
lender and its counsel must be diligent and actively engaged.

This article is presented for informational purposes only
and is not intended to constitute legal advice.

Trade alert – May 2014, issue 5

Jurisdiction Update: Ireland


Spain may still be considered the 2014 darling of distressed investors when it comes to real estate, but Ireland continues to provide investment opportunities, and May saw the announcement of further portfolio sales. The National Asset Management Agency (NAMA) (Ireland#39;s bad bank) announced its biggest sale to date of loans of a single developer in the form ofProject Tower(which includes prime Dublin development land) to Blackstone Real Estate Partners Europe IV, and the Irish Bank Resolution Corporation (IBRC) (in Special Liquidation) completed the sales ofProject SandandProject Stonethis month, taking IBRC#39;s total sales across five portfolios to euro;19.8bn.

It#39;s not only Irish banks that are selling.Lloydsis one of the biggest sellers of Irish loan portfolios, including the loans it picked up when it took over HBOS in 2009 as well as some of its own. Lloyds#39; first Irish disposal was Project Prince in June 2012 and it has since completed three Irish commercial property deals namely, Projects Pittsburgh and Lane and the single Moran hotel loan (aroundeuro;2.3bnin aggregate).


Due diligence, due diligence, due diligence:Portfolios comprise multiple (sometimes several hundreds) of credit facilities and related security documentation. Bid costs are to be considered in light of the number and nature of the borrowers#39; underlying jurisdictions, and buyers should bear in mind that expertise across various legal disciplines including; finance, insolvency, property, derivatives, corporate and tax (both for the transfer of the assets and structuring of the transaction) will be required.

NAMA and IBRC generally require the transaction documents to be governed by and construed in accordance withIrish Lawand for theIrish Courtsto have exclusive jurisdiction.Buyers should not expect to receive a full suite of robust representations and warranties in relation to the assets, particularly where the portfolio is being sold by an entity in liquidation, therefore due diligence is key.

Security:enforcement strategies will depend upon the structure and nature of the borrower (operating co. or property holding vehicle), the nature of security, eg mortgages granted by special purpose vehicle borrowers over real estate assets, charges/shares in the borrowers, floating charges over the whole, or substantially all of the borrowers#39; assets and whether enforcement will be against individual assets or portfolios. Assignments are perfected by notifying the debtor, as under English law and trusts are recognised in Ireland. A security trustee can enforce its rights in the courts in Ireland on behalf of secured lenders in accordance with the terms of the relevant security documents.

Purchasing entity:the purchasers of Irish loan portfolios tend to be Irish SPVs or regulated Irish investment funds (namely and Irish Qualifying Investor Fund (QIF) or an Irish Qualifying Investor Alternative Investment Fund (QIAIF)) or, sometimes, a combination of both. SPVs are established as qualifying companies for purposes of Section 110 of the Taxes Consolidation Act 1997. One important point worth noting is that Section 110 companies cannot directly hold physical real estate while they are used to acquire the loan portfolios, at the point of enforcement a QIF or QIAIF is often used as they do not have the same restrictions on holding real estate.

Tax:The tax analysis of the purchaser will be a crucial structuring point. One issue to consider in this context is withholding tax on returns to investors/lenders of the purchasing entity. Withholding tax applies at thestandard rate of 20% on interest paymentsmade by Irish companies. For SPV (Section 110) purchasers it is possible to prevent Irish withholding tax arising including where the SPV is funded by listed debt securities or where the SPV is funded by lenders located in a country with which Ireland has a double taxation treaty. Ireland currently has taxation treaties with 70 countries, 68 of which are in effect.Distributions out of Irish investments funds are not subject to withholding tax.

Banking license considerations:while it is not necessary to have a banking license in Ireland for the purchase of loan receivables or the advancing of funds to corporate borrowers in the ordinary course of business, a license is required under theIrish Consumer Credit Act 1995for housing loans, therefore it is important to identify if there are anyloans to individualsas part of the portfolio that may require a license and take this into consideration when structuring an acquisition.

Other Portfolio Requirements:borrower consentsmay be required as well as notices to agents/borrowers and the timing of completion of the transfer of the underlying assets should be considered when addressing closing mechanics. Consider put-back options or alternative settlement mechanics if legal transfer cannot be completed for all assets prior to the closing deadline. Aside from its title to the loans, a seller may want totransfer its hedge exposureas well as anyagency functionto the buyer and appointment of anasset managerandservicermay be required to administer and manage the underlying assets to maximize value. Fee structures (including tax) to be considered at the outset as well as timing implications for settlement to correspond with transfers of the underlying loans in accordance with the credit agreement terms.

Recent legislation:The Credit Reporting Act 2013 establishes a database of information called the Central Credit Register (the Register); and contains new mandatory requirements for credit providers to (i) provide information about people and entities seeking credit; and (ii) carry out searches of the Register before approving a credit application.

This legislation applies to anyone providing credit and anyone who is borrowing or guaranteeing such credit. The Register will be operated and monitored by the Central Bank of Ireland once established, which is unlikely to occur prior to 2015.


BORROWER CONSENT REQUESTS DECLINED:A number of proposed new lenders in various European facilities have recently been declined Lender of Record status by Borrowers where consent is required for a transfer.

CYPRUS:The Central Bank of Cyprus releasedMonetary Financial Institutions Deposits and Loans Statisticson 28 May 2014 (click link for details). Deposits and shares continue to trade in Bank of Cyprus. KYC requirements with BoC are extensive for Buyers and impact settlement times. To view the Cyprus capital controls decree which came into force on5 May 2014, pleaseclick here.

TORM AS:The companysUSD1.6bndebt pile was restructured in November 2012. Efforts to raise new money in order to recapitalise the business were reported as ongoing including a new money restructuring proposal by the company to the lender syndicate on 15 May 2014. Cadwalader is advising market participants in relation to the existing restructured debt and Danish, Norwegian and Singaporean security local law issues.

EIRCOM:It was reported that Eircom is poised to hire a local corporate advisor on strategic options, including a possible London and/or Dublin flotation. Buyers should confirm consent and tax requirements before trading debt or shares.

MODACIN FRANCE SAS (CAMAIuml;EU):the EUR700m Senior Secured Facility debt extended to the French womens fashion retailer traded in May following the conclusion of the restructuring in February 2014. Financial news sources reported that the companys management presented a positive view of the companys recent performance at a meeting with lenders on 23 May 2014. New Lenders are required to notify assignments to the Borrower by French bailiff (huissier) to perfect transfers under French law.

Energy Future Holdings Corp.(formerly TXU Corp), the largest power producer in Texas and its direct and indirect subsidiaries (includingEnergy Future Competitive Holdings (EFCH), Texas Competitive Electric Holdings Company LLC (TCEH), Energy Future Intermediate Holding Company LLC (EFIH) (with the exception of Oncor )) was grantedChapter 11 Bankruptcy Protection on 29 April 2014in United States Bankruptcy Court for the District of Delaware (Energy Future Holdings Corp., jointly administered under Case No. 14-10979). The Company entered into a Restructuring Support and Lock-Up Agreement agreed with certain of its key financial stakeholders to reduce its debt and has since received court approval to access$2.3bnTCEH DIP Financing support.

As of 31 December 2013, the group had total assets of$36.4bnand total liabilities of$49.7bnincluding a$22.635bnCredit Facility advanced toTCEHandEFCH(maturing October 2014 and October 2017) consisting of$19.519bninitial term loan facilities, a$2.054bnrevolver and a$1.06bnletter of credit facility, as well as numerous series of secured and unsecured notes issued at various levels of the group structure (click here to view chart).

TXU CREDIT DEFAULT SWAPS:LCDS Auction resultswere published on21 May 2014for The Texas Competitive Electric Holdings Company LLC, and CDS Auction results were published on the same date for The Texas Competitive Electric Holdings Company LLC, Energy Future Holdings Corp. and Energy Future Intermediate Holding Company LLC/EFIH Finance Inc (link to auction results).

WHAT#39;S NEXT?on 7 May 2014, the Energy Future Intermediate Holding Company LLC (EFIH) and EFIH Finance Inc. commenced an offer to holders of theEFIH First Lien Notes(early participation date expired on 19 May 2014, offer period expires on6 June 2014) in exchange for EFIH First Lien DIP Loans (link to First Lien offer) and on 27 May, the Company announced that the cash tender offer period for theEFIH Second Lien Noteshas been extended to3 July 2014and the early participation date now expires on11 June 2014(link to Second Lien offer).

CREDITORS#39; MEETING:to be held onJune 4 2014 at 1.00 pm(EDT) at the Double Tree Hotel, Salon C, 700 North King Street, Wilmington, Delaware 19801.

CLAIM FILINGS:The deadline for the filing of proofs of claims against the debtors is yet to be established.

For further information:EFH#39;s restructuring information is available at:http://www.energyfutureholdings.com/restructuring/

Court filings, chapter 11 petitions, and claims information is available at the website maintained by the Companys Noticing Agent, Epiq Bankruptcy Solutions:http://www.efhcaseinfo.com/.

Garry Ferguson

Nest Egg-onomics: Financial Engines Revs Up Retirement Plans

When they were newlyweds 23 years ago Jeff Maggioncalda’s wife, Anne, challenged him to a Monopoly battle. Determined to gain the upper hand, Jeff secretly created a program, known as a simulation engine, to model the results of 1 million Monopoly games and used it to generate a list of probabilities and payoffs for all the game’s properties. “We played until she realized I had this little cheat sheet, and then she thought I was a total jerk,” he laughs. (Actually, Anne, whose PhD dissertation was on the reproductive strategies of male orangutans, was amused by his creative adaptation.)

Maggioncalda, 45, has used his knack for simulations (and for landing on the corporate equivalent of Boardwalk) to win at a real-life game, too: the financial advice business. As chief executive of Financial Engines Financial Engines he has built the nation’s largest registered investment advisor, with (as of Mar. 31) $92 billion in 401(k) assets under management for nearly 800,000 workers of 553 big employers, including Alcoa Alcoa, DowCorning Corning, Ford, IBM IBM and Microsoft Microsoft.

Savers pay Financial Engines from 0.2% to 0.6% of their 401(k) assets annually to manage their nest eggs based on modern portfolio theory, which aims to maximize the return for a given level of risk. Its computers run thousands of scenarios (known as a Monte Carlo simulation) to give each worker a picture of how much retirement income he or she is likely to have, and use an “optimization engine” to determine the best portfolio given the costs, quality and styles of the mutual funds available in each 401(k), with a preference for low-cost index funds. Clients can consult with humans manning call centers, but the advice they’ll get comes from the computer models. (For two examples of Financial Engines’ portfolio makeovers, see below.)

Now, with its baby boomer clients edging toward and past 60, Financial Engines is angling to grab a piece of another potentially big business: managing assets and income payouts for retirees.

“Retirement income … it’s a really hard problem. You’re looking at a 30-dimension probability distribution,” observes Nobel-winning economist William F. Sharpe, a cofounder of Financial Engines. While Maggioncalda’s entrepreneurial energy has built Financial Engines, the 80-year-old Sharpe, who won the Nobel in 1990 for his work on the pricing of financial assets and the relationship between risk and return, is at its intellectual core.

Back in 1996 Sharpe was offering asset allocation software he’d developed on his website for free-to, as he puts it, “give ordinary people the tools to think probabilistically about their investments.” But during a long lunch at Stanford University’s student union, Joseph Grundfest, a Stanford Law professor and former member of the Securities amp; Exchange Commission, persuaded him that he’d make a bigger impact with a for-profit business. “If we’re serious about changing how people behave in the real world, we’re going to need to start a company,” Grundfest told Sharpe over a second cup of coffee.

The two academics, along with the late Craig W. Johnson, an attorney who took equity positions in startups, seeded Financial Engines, and Grundfest went hunting for someone to run it. “You needed a candidate who could have an intelligent conversation about modern portfolio theory with Bill Sharpe. Right away your pool of candidates gets cut down by 99%,” he says. Grundfest settled on Maggioncalda, then a 27-year-old newly minted Stanford MBA. who had written a prescient case study about how the Internet could disrupt the stock brokerage business for a class taught by Intel founder Andy Grove. The three older men hired Maggioncalda to write a business plan and promised to eventually make him CEO-if he could raise the venture capital to build the business. “At that time the idea of a 27-year-old CEO in Silicon Valley wasn’t broadly accepted. Today, at 27, you’re washed up,” muses Grundfest, now 62.

But the venture capitalists didn’t bite on the initial plan, which was to sell Sharpe’s asset allocation software for its educational value. “That was one of the worst periods. I thought, ‘Oh, my God, I’m going to flame out,’ ” admits Maggioncalda, who had turned down a job at consultant McKinsey amp; Co. to gamble on the startup. Time for plan B: Financial Engines would jump through the regulatory hoops to become an SEC-registered investment advisor so it could make specific fund recommendations. “By February [1997] we had raised $4.3 million, and we were off to the races,” says Maggioncalda, who ultimately raised $150 million from VCs before taking Financial Engines public in 2010.

In 1998 Financial Engines offered its first retirement planning/fund picking software online. Maggioncalda’s big idea was to go to large employers who could buy an annual subscription for $35 per user. He signed up Alza Pharmaceuticals, Clorox, Gap and Netscape as pilot customers.

But the tool appealed to only a tiny segment of 401(k) participants–mostly older, well-paid workers with large balances who were already highly engaged in managing their accounts. In focus groups other workers said they’d prefer that Financial Engines manage their 401(k)s for them. In September 2004 Financial Engines offered its first managed accounts to Motorola and JC Penney employees, and by that December it had $1 billion in assets under management. “That’s when I said, ‘This is it,’ ” says Maggioncalda. The timing was certainly right. In the next few years big companies like IBM and Alcoa would begin freezing their traditional pension plans (which pay retirees a set amount each month), ending or limiting new contributions to those plans, and increasing what they put in workers’ 401(k)s. That meant 401(k) balances were about to grow and become central to retirement security.

While Financial Engines is the dollar leader in managed accounts, it wasn’t first. Morningstar got into the business in 2002 and now manages $33 billion for nearly 1 million savers. (It serves small and midsize companies, whose workers tend to have lower balances, as well as big employers.) GuidedChoice, cofounded in 1999 by Nobel-winning economist Harry Markowitz, manages $10 billion for 120,000 workers, including ones at ADP, Charles Schwab and McDonald’s. (Markowitz is the father of modern portfolio theory.)

Maggioncalda sees target-date funds as his biggest competition–for the dollars they suck up and the pressure they put on fees. In 2013 Financial Engines’ revenues rose 29% to $239 million and net income grew 61% to $30 million. On a fully diluted basis, earnings per share were up 54% to 57 cents. Yet margin fears have driven its stock down from a 52-week high of $71 to $46.

According to Cerulli Associates, target-date funds, which adjust asset allocation based on a worker’s age or target retirement date, held an estimated $618 billion at the end of 2013. Financial Engines’ average 0.4% fee is on top of the costs of the mutual funds, making it a lot more expensive than target-date funds from Vanguard Group or the index-fund-based targets from Fidelity Investments, both of which have an all-in fee of only 0.16%. Moreover, if your 401(k) offers Financial Engines, or you keep $50,000 or more in a Vanguard Group account, you can run its fund-picking software for free without shelling out for a managed account.

But some target-date funds charge in excess of 1%, and managed accounts offer more customization, tweaking allocation based not only on an individual worker’s age but also his net worth, taste for risk and ownership of company stock. So, for example, if a tech worker has 20% of his 401(k) invested in his employer’s stock, the model goes light on tech stock in the rest of his portfolio.

Financial Engines and benefits firm Aon Hewitt have collected reams of data showing the value of professional advice–particularly during a market meltdown, when some do-it-yourselfers may panic, as happened in 2008. Crunching results for 723,000 workers’ 401(k)s at 14 companies from 2006 to 2012, they found that those using help (through managed accounts, target-date mutual funds or online advice) earned a median annual return 3.3 percentage points higher, net of fees, than participants who got no advice.

Bankrupt MedLab Gets Nod For $5.5M Unit Sale


By Jamie Santo

Law360, Wilmington (June 11, 2014, 3:04 PM ET) — Clinical testing firm Laboratory Partners Inc., also known as MedLab, received the blessing of a Delaware bankruptcy judge on Wednesday to sell its long-term care division to Amerathon LLC for a $5.5 million credit bid.

At a hearing in Wilmington, US Bankruptcy Judge Peter J. Walsh approved the sale of the companys remaining operating unit to Amerathon, a joint venture that includes MedLabs senior secured lenders.

Ill sign the order, Judge Walsh said, after overruling a creditor objection to a provision in the purchase agreement….

Alexander Hamilton: Strong Governments Impart Financial Security


First US Treasury Secretary

Indispensible Wisdom: Sovereign strength begets financial stability

Nickname: Little Lion

Killer internship: Aide-de-camp for GeorgeWashington during the Revolution

Bestseller: The $10 bill

Money Quote: “A nation which can prefer disgrace to danger is prepared for a master, and deserves one.”

Fundamentals: During the period when America was an emerging market, Hamilton was a tireless advocate for responsible federal finances. He knew that a strong central government was a prerequisite for robust economic growth. Lesson: Don’t buy securities in developing countries with dodgy rulers.

Invest Like Hamilton: You can always be a purist and buy US government bonds, but if you want to venture overseas, be sure to do plenty of homework first. Even with interest rates near historic lows, don’t write off the usefulness of bonds to act as insurance when the world turns chaotic. The iShares Barclays Barclays 20+ Year Treasury Bond (TLT) ETF gets you exposure to long-term US debt. In equity investments, stick with countries that have strong traditions of respecting personal property and enforcing the rule of law. The Vanguard EAFE (VEA) gets you the developed world.