I got an email from a reader that made a great point about Ackman's Borders (BGP) transactions that says a bit more about the current lending environment.
Here is the body of the email:
"It is very possible that since banks have cut their traditional margin lending lines to hedge funds and this is a way to get around the issue.
The only benefit of a total return swap is that it employs leverage, the same sort of leverage banks were providing hedge funds before the credit freeze.
My best guess would be that Ackman has found a way to borrow money through the banks swap lines which allows him access to capital he was unable to tap through his regular margining of assets......"
Dave (last name omitted for privacy)
Now, I have no idea what a guy like Ackman pays for a margin line, but I am sure his borrowing cost has gone up like everyone else's. For the swaps, he is paying $.03 cents per share commission and interest only on any "negative" performance in the shares. For this he is giving up taking profits (if there are any) and dividends until 2009 when the swaps are settled.
Ackman now is able to build his position (although the swaps represent non-voting shares since he does not actually "own" them) without the cash outlay that would be required normally OR a high interest margin payment.
It also says that while he now has a 24% "economic interest" in the company he may begin to push hard for an agenda.
This really is a neat thing.... Agree or disagree with the guy, he is a bright one..
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