The CRAZY world of Credit Default Swaps
CDS incentivizes lenders to overleverage a company and not care whether the loan can ever be paid back...the key is being able to make money on the SWAPs and make sure you are on the "right" side of the trade.
Here is an example of Beazer Homes paying up to twice as much interest to payoff a loan at a relatively small discount so they can book a short term profit on the transaction despite paying much higher interest over the long term..... interest is not expensed for homebuilders, but capitalized into inventory....why do you think inventory on the balance sheet is going up each quarter?....then only to get whacked by an "one time" inventory writedown time and time again?
Beazer Homes, which began restructuring its significant debt load in June, announced a second round Tuesday.
The Atlanta-based company, which recently bought back or agreed to buy back $139.3 million worth of notes due in 2011, 2013, 2015, and 2016 for $102.5 million, said it plans to issue new notes due in 2017.
While Beazer gained $34.5 million because it bought back the old notes at a discount, the company will pay a heavier price for the new debt and the time it bought the company. The old debt interest rate varied from 6.5% to 8.125% while the new debt is at 12%.
If you are a legitimate builder trying to compete with money losing swap supported Beazer, good luck trying to sell a home at a profit. This is why so many money losing public companies can still be supported by Wall Street even though they have little prospect of making a profit as they dig a deeper and deeper debt hole and the premiums on SWAPs continue to rise.
Welcome to Zombulation Nation....where profits are for panzies and corporate tax receipts to government have evaporated.