Monday, October 06, 2008

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

—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.


John Sweda said...

Oleg Deripaska is known as “king of Russian aluminum” and is the world’s 40th richest man, according to the latest Forbes listing, and the wealthiest man in Russia. Married to one of the Boris Yeltsin’s nieces, he is one of the select Russian moguls backed by the current leadership at Kremlin.

PhillipCharles said...


Interesting read.

(As an aside)
If the overriding domestic concern of this 'crisis' is that U.S. businesses are restricted in obtaining loans because banks are too spooked to lend, I would consider this move today by the Fed to reinforce the CP market very substantial. If effectively combined with their ability to take illiquid assets off the hands of financial institutions, then this is less and less about a rebound in home prices and more about consumer demand and more-prudent loan practices going forward. I just don't see where the long-term downside exists and where this 'sky is falling' mentality will continue to get its legs. American consumer demand is as certain as the sun rising in the east and business will do its best to meet it, if the Fed can keep the wheels greased. I see all of this as being short-lived.

And if the equities markets wish to overreact...that is fine with me.

Michael said...

I am surprised that it took that long. Since the days of MMM in Russia, most of finance industry was based on either lending to sales distributors or companies that were barely different from Ponzi schemes (like say, MMM). And just like in US, being in the finance industry has been "in vogue" for quite a bit and everyone liked their bonuses for nothing. Now they get to learn that capitalism does not mean eternal prosperity and no responsibility.

PT said...

This leads me to wonder if there might be some financial incentives overriding Mr. Putin's politics with the BP-Gazprom Joint Venture that headed into the tank in April and sprang back to Life in September.

Anonymous said...

I seem to recall some evidence that foreign investors in US markets (equity, fixed income, or physical assets including land) have arguably the worst market timing abilities in the known universe. This seems like more evidence thereof.

And phillipcharles - you may see all of this as being "short-lived," but that isn't going to mollify the folks who've seen their 401(k) and other retirement accounts decimated my market behavior that seems to be impervious to anything the Fed, ECB, BoE, etc. happens to do. As Lord Keynes pointed out a long time ago, "In the long run, we are all dead."

Alex Truck said...

As a former Soviet/Past Soviet citizen, I wanted to say, what goes around comes around.