I was trying to track down the numbers on Bank of Ireland's recent debt-for-equity swap, when I stumbled across this from September 2009:
Robert Dyas, the hardware chain, has secured its future after agreeing a debt-for-equity swap that hands a majority stake in the business to its lenders.... The retailer which is based in Leatherhead and was bought by its management earlier this year, has arranged the refinancing agreement in order to more than halve its debt liabilities and radically reduce its annual borrowing costs. Its debts have now been reduced to £15m and annual borrowing costs cut by nearly £2m.
In return Robert Dyas's lenders – Allied Irish and Lloyds Banking Group – have taken a majority stake in the chain. Despite this, they have not got a controlling interest in the retailer in terms of voting rights...
Of course the company did not 'halve its debts' as such, what it did was convert repayable finance (loans) into non-repayable finance (share capital); while its borrowing costs will go down, the amount it will pay out as dividends goes up - it's a legal rather than an economic distinction. Either way, the banks will probably get a lower return on the original loans than they expected.
But the joke is that companies who borrowed recklessly from the bank, are being forced to do debt-for-equity swaps with the bank; and in turn, the banks that lent recklessly have less income to repay their own borrowers and so they too are forced (market forces, y'understand) into debt-equity-swaps with their own lenders and so on.
To complete the circle, let's assume that the man who sold Robert Dyas used the proceeds to buy bonds issued by the same bank that lent the management the money to buy Robert Dyas. The bank ends up owning a large chunk of the shares in Robert Dyas share, and the man ends up owning a large chunk of shares in the bank. So apart from all the income all this generated for investment banks and so on, not much has happened.
Elevate their cause?
8 minutes ago
6 comments:
You've hit the nail on the head and Xxxl and I have been rabbiting on about this for quite some time. Janet Tavakoli had some choice things to say too - at least people listen to her.
JH, I am indifferent as to how Robert Dyas' new owners sort things out with their lenders, the real relevance of this is that there is no need for taxpayer-funded bank bail outs. If the govt. left them to their own devices, this is exactly what would happen.
How to stop the buggers doing it - that's the issue.
As you know, Mr W, I hate to give you credit for anything because you are rude to me far too often. But you first illustrated the debt-for-equity swap concept in a way I found not only persuasive but unanswerable.
It deflates credit bubbles by putting the real loss where it should always lie - with those who have invested to make a profit and should, therefore, carry the loss when something goes wrong.
The example you give in this piece is splendid. There is a loss, so that loss is transferred to the investors, who then make a loss so they transfer that loss to their investors and so on. The result is to leave each trading entity with more sound accounts and a greater ability to weather future storms while also ensuring that bad debts are borne by those who should bear them.
That it is a chain-reaction is a good thing. May we see much more of the same so that the state of current accounts is realistic and not faked by bubbles.
JH, if everybody knew what a bank balance sheet looked like and that a D4E swap would 'work', then maybe they wouldn't be so keen.
TFB, thanks. The beauty of the system is that it is not so much 'a loss being transferred to investors' as a case of 'investors forced to accept the fact that they have already made a loss'* and 'business owners forced to accept that they overpaid for the business'.
* The banks' loans to RD would presumably be 'impaired debt' or 'doubtful debt' and the market value of those is far less than the original nominal amount of the loan.
Absolutely right, Mr W.
To talk of a company making a loss is to talk nonsense. A company can never make a profit or a loss because a company is a vehicle through which investors make profits or losses.
Post a Comment