So far, the lenders have proved remarkably robust. Once they can do no more damage to one group of borrowers… they move on to the next! Techs, telecoms, dotcoms, subprime… now they are falling all over each other to lend money to private equity deals.
Investors’ “appetite for risk rises,” reports Bloomberg – focusing on the growing appeal of futures contracts over boring old bonds. With all the trillions of dollars worth of derivatives already passing through the world’s financial digestion, a trade war with China getting underway… and perhaps a real war with Iran (Russian intelligence sources say it’s brewing in a matter of days)… you’d think it would be time to push away from the table and light a cigar. But no… they’re still chowing down. “Deals… deals… deals – give me more deals!”
Sam Zell just scored a big one – buying the Tribune (NYSE: TRB) company. It took $8 billion to swing the deal, according to the press reports. But Zell put in only $315 of his own money. The rest was ‘leveraged’ – debt, in other words. How? It’s not clear but there is speculation that Zell is using a leveraged Employee Stock Ownership Plan (ESOP). That is, he will borrow a huge amount of money through the plan and have employees vest into the stock over time as a pay back. A big attraction to the new owners would be the significant tax benefits, but what happens if the value of the company declines in the future, as it might, with all the new debt added?
We don’t know. But there is debt everywhere. If it ever gets marked down… there will be a lot of unhappy investors around. Reports also say that Tribune might invest a part of employees’ pensions in the new firm… without even seeking the beneficiaries’ permission.
Maybe lending billions to a real estate tycoon so he can buy into a newspaper business, whose sales must be under threat from the Internet, is a good financial move. Maybe it is not. We have not looked, but there is bound to be Mr. Goldman and Mr. Sachs in the deal somewhere.
Markets and Money