• Jeff Matthews

Russians Discover Leverage Cuts Both Ways


Russian Tycoon Turns Big Stake Over to Creditors Divestment in Auto-Parts Maker Shows How Financial Turmoil, Stock Free Fall Hit the Country’s Wealthy Power Brokers By GREGORY L. WHITE —The Wall Street Journal

A year ago last summer, we attended a conference at which the keynote lunch speaker—the chief investment banker of one of Wall Street’s largest, and still functioning, brokerage houses—gave what we thought at the time might go down as one of the all-time market-topping speeches we had ever heard.

And, in hindsight, it was.

The banker told the assembled gathering that in light of the enormous pools of capital, including sovereign wealth funds and private equity, not to mention corporate buyers, “no company was immune” to the takeover binge sweeping the world.

“You’ll see a $100 billion deal before this is over,” he boasted, and explained with a straight face how the flexible financing and easy terms being accorded ridiculous ideas such as the leveraging of Freescale Semiconductor would make those buyouts impervious to down-cycles.

For proof of how deep the pool of capital was, he put up a slide showing the respective buyers in various circles, with the size of the buyer represented by the size of the circle. We can’t find our notes right now, but what struck us most was the circle labeled “Russian Oligarchs.”

That’s right. For one brief, shining moment, a handful of well-connected thugs had accumulated so much money and power that they represented an entire class of buyers in a Bubble that seemed as if it never could burst.

Well, burst it has, most spectacularly here in the U.S. And by the looks of things it is bursting all around the globe.

Even those once untouchable “oligarchs” seem squeezed, as the Wall Street Journal reports:

MOSCOW — One of Russia’s billionaire tycoons, Oleg Deripaska, gave up a showcase Western acquisition to creditors, in the first public example of how the global credit crisis is squeezing some of the country’s wealthiest and most powerful men.

Mr. Deripaska, who controls aluminum giant UC Rusal and auto company OAO Gaz, has holdings that span energy, construction and banking. On Friday, his holding company confirmed turning over to creditors his 20% stake in the Canadian auto-parts maker Magna InternationalInc.

A year ago, he announced a strategic partnership with Magna and bought the stake for $1.4 billion, using loans collateralized by the shares to fund the deal. But the shares have fallen in value because of weakness in the global auto industry. Last we looked, nearly every commodity ‘accumulated’ by the oligarchs—oil, zinc, copper, aluminum, to name a few—has dropped in price, some more than others.

And if all the oligarchs have leveraged themselves as Mr. Deripaska appears to have done—like a Miami condo buyer juggling mortgage payments—the next time that circle appears on the investment banker’s slide show, it will have shrunk quite dramatically.

Jeff Matthews I Am Not Making This Up © 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

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GENERAL

The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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