Alt lending week ending 11th. November 2022
Is Musk’s Twitter deal such a good idea?
Interesting story from The Daily Telegraph questioning the wisdom of the controversial takeover by Elon Musk of Twitter. This saga began in April this year there have been many twists and turns along the way. However, the biggest must be the seismic changes in the capital markets and the move away from the anything goes deal in the markets to a more sceptical and risk averse stance. This is not surprisingly a leveraged deal and much of the $ 44 billion needed to complete the purchase has been provided by a group of banks led by Morgan Stanley, Bank of America, and Barclays. As a trained analyst and an ex-arranger of syndicated loans for one of the said banks I can confidently say that in my day getting such a deal approved would be impossible. The difference is that these days “investment banks” don’t intend to keep the risk on their books. When I was underwriting, I had to look at how the asset would look on the books not just of my bank but a whole load of other lenders, mainly banks. The boys these days are like celebrity chefs cooking up a meal that looks great on the menu but can give you sever stomach cramp if anything goes wrong. Well in this case it has. Interest rates are rising aggressively and Twitter, which has never made much money since it went public is already highly leveraged. The interest burden is pushing it into the red as we speak. The lead management group have already conceded they might have to hold the Twitter paper longer than they expected. It could be long time indeed.
Is Bank of England making a mistake?
A paper written by Credit Suisse analysts argue that the Old Lady’s pronouncement on the expected peak of Sterling interest rates are underestimating the impact of the consistently tight labour market in the UK on inflation. Well they may be right but firstly who wants to listen to what Credit Suisse has to say about anything at the moment. Having said that the Bank of England’s forecasting over recent years has been less that impressive to say the least. Economists can say what they like because they always have a good story when they get everything wrong. I remember from my time in Greece having a quarterly bet with my old colleague, Oxford economics guru, George Magnus about the level of the Greek drachma three months hence. I won every time but George could always tell me why I won.
When writing about lending I am usually focussing on the lender and not the borrower but I was reading an article today about highly leveraged Grocery chain Morrisons which was putting emphasis on how it felt about its current situation. Morrisons has been hit quite hard recently by increased competition from the German discounters and its results have suffered accordingly. Morrisons was the subject of a bidding war some 13 months ago between two wall street houses sniffing a bargain. The winner was Clayton, Dubillier and Rice (CDR)the current owners. However market conditions are now completely different and in todays world it looks like they have significantly overpaid. As in all such transactions, part of this deal was financed by the company being acquired and the new owners have loaded £ 2billion of acquisition loans onto Morrisons balance sheets. This debt is apparently held by some 19 banks and the paper will nob be significantly downgraded. So what is Morrison’s view on this. Remarkably sanguine. Apparently these credits have a seven year maturity and the underlying documentation is extremely flexible. This means that there are no financial covenants in danger of breach. It is therefore the banks problem and not theirs. So lenders, the small print is pretty important when buying their party debt. The choices are binary take whatever price is available in the market or sit it out for seven years and hope for the best.
Howard Tolman is a well known London based Banker, entrepreneur and technology specialist.