SWAPS are financial crack
Specialty drug maker Warner Chilcott Ltd. is expected to announce as early as Monday the acquisition of Procter & Gamble Co.'s prescription-drug business for more than $3 billion, say people familiar with the matter, a sign that the market for loans on more highly levered deals may be loosening.
Six banks, led by J.P. Morgan Chase & Co. and Bank of America Corp. and including Credit Suisse Group AG, Citigroup Inc., Barclays PLC and Morgan Stanley, are expected to put up as much as $4 billion in financing for the transaction. Roughly $3 billion will go toward the acquisition, with the remainder refinancing $1 billion in existing Warner Chilcott debt.A leveraged loan is typically defined as a loan made to a borrower with a credit rating below investment-grade or that already carries a good amount of debt.
The deal is one of the larger transactions in a weak summer market for acquisitions. But perhaps its biggest impact will be on the dormant markets for deal financing, which has been largely shut since the mid-September 2008 collapse of Lehman Brothers Holdings Inc. Financing for deals have lately been mostly limited to big companies with strong credit ratings. None of the banks wanted to underwrite this deal alone, but "no bank wanted to miss out," said one person familiar with the matter.
The banks are in part attracted to the transaction because they can demand higher underwriting fees than during the last big deal-making cycle in the middle of the decade, said one person familiar with the deal.
Warner Chilcott is able to absorb those fees because interest rates remain historically low, which keeps the company's overall borrowing costs down despite the banks' additional charges.
So here we go again...lending billions to a below investment grade company. It doesn't really matter if the company can ever pay back the debt.....the fees will be a good start. Then they can slice it up and sell it to our pensions making even more money.
But the real fun starts when the banks start selling the SWAPS. The worse the financials, the higher the SWAP premiums.....and my how the premiums can roll in.Since there is no limit to the amount of insurance the banks can sell on the debt, the premiums can actually exceed the amount of debt.....so long as the debt doesn't default, the SWAP never has to pay off.
OR IF THE BANKS WANTS TO TAKE THE OTHER SIDE OF THE TRADE, THEY CAN FORCE THE COMPANY OUT OF BUSINESS BY CALLING THE LOAN ON THE INEVITABLE COVENANT VIOLATION.
THE BANKS GET TO PICK AND CHOOSE WHETHER THE COMPANY LIVES OR DIES AND GET PAID BOTH WAYS.
As the loan becomes more distressed, the higher the SWAP premium with cash rolling in so long as the loan doesn't default. Often times it is our pension funds who are the buyers of the SWAPS.....or in some cases, municipalities are sold the intruments costing taxpayers billions.
Often, just before the loan is about to default, and billions of premiums have been generated.....out of the blue someone comes in to refinance the debt and allow the distressed business to keep on operating. In other words, the worse management runs the business, the more money the swap writers make.
If the business has competitors, they are screwed because they have to try to operate at a profit. In the end, the money losing SWAP business has an unfair competitive advantage because they can sell at any price and know the rich uncle will come in at the end to extend and pretend they are trying to make money.
The public homebuilders are collectively the best example of an industry that has seen hundreds of private builders go out of business, hundreds of thousands of jobs cut, and millions of homes crash in value due to the money losing overbuilding practice of the SWAP protected public builders. The public homebuilders have lost tens of billions over the past three years but managed to not get called on the covenant violations.
It appears the banks have learned nothing from the trillions of taxpayer dollars they just received as a result of a massive number of loans defaulting. Or the millions of Americans that have lost their jobs while our pension funds are evaporating, our tax receipts are contracting, and real estate values are crashing, while citizens and private businesses are going bankrupt at rapidly increasing rates.....simply so bankers can make trillions destroying our nation's economy.
Welcome to the Ponzi world of credit default swaps......pretty soon they will destroy the economic world as we know it unless we restructure debt and bring back a fair playing field.
Remember, if government is out of money....it will need everything you have to maintain soverignty.