The American and foreign energy company

The American and foreign energy company was a listed company that became a speculative favorite in the late 1920s. Benjamin Graham has written about it in the safety analysis and used it as an example of the financial innovation and speculative surplus that characterized this period.

AFPC issued a number of securities in the 1920s: bonds, common stock, two types of preferred stock and stock options options. Stock option warrants were essentially what we now call warrants: instruments created by the issuer that allowed investors to buy newly issued shares at a specified price.

Graham wrote that in the 1920s, warrants turned from a niche instrument to a standout security: they were originally linked to bonds and preferred stock to convert them into common stock. In this form, "the warrants themselves had little meaning in terms of the capitalization structure of the company." But in the late 1920s they were widely used and traded as discrete securities and used as a popular speculation.

AFPC was at the head of this change. In 1929, the registered capital was worth $ 300 million, which would have qualified the company alone as a major issuer of securities, but its warrants were worth many times over:

The warrants issued by a single company - the American and Foreign Power Company - reached a total market value of more than $ 1 billion in 1929, a figure equal to our public debt of 1914

But what followed:

It is an astounding fact that the warrants created by a firm, American and Foreign Power, reached an indexed market value of over $ 1 billion in 1929, a figure that exceeded the market value of all railroad ordinary shares Listed on the New York Stock Exchange less than three years later in July 1932.

APFC itself was not immune to the global economic crisis. At its low point, the company "trembled" on the edge of citizenship, which shows at a price of only 15 1/4 for its 5% bonds. "

Except for

In the Golden Twenties, Graham used AFPC to illustrate the financial development in a particular time period. He gave only a small section of the interesting company history. Fortunately, an article on Academia.edu, "Rise and Fall of American and Foreign Energy Companies," provides a more detailed description of the company and its experiences.

AFPC began as part of a holding company called Electric Bond & Share, itself a subsidiary of Thomson-Houston, a predecessor to General Electric.

Thomson-Houston sold electrical appliances to utilities. By the late 1800s, when electrical transmission was still a recent invention, most utilities were small and under-capitalized. Thomson-Houston provided them with a form of creditor financing, taking the suppliers' debts and equity securities as a partial payment for their equipment.

In 1905, she organized Electric Bond & Share as a subsidiary to hold these securities. While EB & S was officially a utility holding company, in practice it was a financial intermediary that combined the securities of a few small issuers into a holding company that could finance itself at better interest rates.

EB & S made its first foreign investment in 1917 and bought electrical systems in two cities in Panama. Soon followed investments in Guatemala, Brazil and Cuba. In 1924, EB & S founded AFPC as a subsidiary to hold these foreign investments. The following year, General Electric launched EB & S and became a separate publicly traded company.

AFPC soon followed as a listed company and pursued the same business model as EB & S, a financial intermediary acting as a utility. The United States had large trade surpluses with the rest of the world in the 1920s, and AFPC as a major international investor helped to recycle these surpluses.

AFPC has strengthened its investments as a listed company and has purchased utilities in Argentina, Brazil, Chile, China, Costa Rica, Ecuador and India. It also bought minority interests in utilities in Canada, Italy, Japan and other countries. In 1929, it acquired Shanghai's municipal utility, making it the largest US investment in China at the time.

The depression followed and AFPC almost went bankrupt. In 1932 she suspended the dividends on her preference shares and paid them back only in 1939. The unpaid dividends that had accumulated in the meantime were significant relative to the market capitalization of AFPC (admittedly diminished).

AFPC's problems during the Depression were both political and financial. Mexico and Cuba forced them to cut electricity prices and many other countries prevented them from recovering profits from their subsidiaries. During the Second World War, the Shanghai aid program had to be written off and Argentina nationalized several of its utilities.

The company's fortune seemed to improve in the fifties, but that was a false morning. In 1960, Fidel Castro seized the Cuban properties of AFPC. At that time they were the largest stock. Brazil also expropriated land, and Mexico forced its utilities to sell to the Mexican government at a lower price. As a result of this theft, the government refused to allow AFPC to recover the proceeds of the sale.

The AFPC responded to these failures with a gradual liquidation. In the 1960s and early 1970s, it sold its foreign utilities and merged with Boise Cascade. The last remaining utility, a property in Ecuador, was sold in 1976. The

emerging markets

AFPC show a great - and, in my opinion, undervalued - risk of investing in emerging markets. Many of these countries have an opportunistic and predatory attitude towards foreign investors. In a time of globalization, where foreign direct investment is increasing, they will respect the property rights of foreign investors, knowing that this is necessary to preserve foreign investment and the benefits it brings.

However, if a depression or financial crisis eliminates the investment plug for foreign investment, these countries will no longer see any reason to respect the rights of foreigners. If their investments are not confiscated, they are subject to measures that drastically reduce their return on investment.

The Academia.edu article states: "The right adventures do not always go as expected, in addition to the normal business risks, including fluctuating exchange rates, there are unforeseen political risks that can significantly affect the return on investment."