Monday, May 25, 2009

Karma Is A Bitch v2

Brand new development in the Porsche saga, and this one could easily be the last nail in the coffin of Porsche Capital Management LLC. Bloomberg is reporting that the $24 billion of paper profits that Porsche generated as a result of the Volkswagen short squeeze may be in jeopardy because the company, which as Zero Hedge reported previously, does not have the cash not only to roll its impending €2.5 billion term loan, but also the money to exercise these very options. Per Bloomberg:
Porsche bought options and Volkswagen stock for more than three years and controls more than 70 percent of Europe’s biggest automaker. Now, Stuttgart, Germany- based Porsche may be unable to raise the money needed to cash in the options, according to research by Sanford C. Bernstein & Co., Sal. Oppenheim jr. & Cie. and FAIResearch GmbH & Co.
What is even more scary for both Porsche and VOW shareholders, is that as the market smells Porsche's weakness, VOW shares are poised to plummet as the only artificial barrier holding them up is now gone.
“The smartest guys in the room are running out of options,” Max Warburton, a London-based analyst at Bernstein, said in an e-mailed message May 19. “We no longer believe Porsche is in a position to control the VW share price and are increasingly convinced that the VW ordinary shares will collapse.”
While Porsche spokesman Frank Gaube on May 21 insisted that the company is "not in a risk situation," the odds are starting to stack against it: first, none other than its own merger partner VW is demanding "transparency" in Porsche' holdings, and second, a slew of hedge funds that saw their P&L plummet as a result of the squeeze will be waiting in the corridors with a whole arsenal of cloaks and daggers to inflict as much pain as possible on the company, whether it is by shorting its stock, or purchasing its CDS and making refi's even more expensive on a matched basis.

The main issue for cash strapped Porsche is that while it has a tremendous cache of "paper"profits on its book, it needs almost €6 billion to exercise its 20% stake in VOW common stock.
Exercising options on 20 percent of VW’s 294.9 million outstanding shares at the strike price estimated by analysts would require 5.9 billion euros, according to data compiled by Bloomberg. The 20 percent stake would have a market value of 14.1 billion euros, based on yesterday’s price.
Unfortunately for Porsche, this is money that it does not have, or rather, that it would have access to, if the credit capital markets allowed it to refinance its secured debt. The way it stands, the company is caught in a Catch 22, where all its stock-based profits, which Porsche already has booked in its corporate earnings, may have to end up being forfeited. Ironically, the only realistic way out for the company now is if an investor, a hedge fund for example, were to lend it the needed money so that it could actually exercise its deep in the money options. However, after the mockery that Porsche made with the capital markets in October, they may as well not wait for the phone to ring.

And last but not least if Porsche lets the options expire worthless, banks that underwrote the calls would be forced to sell VW common shares they bought as insurance, lowering the stock, and potentially causing a lot of pain for the CFOs of both companies.

All in all, the Volkswagen soap opera is developing with just the right amount of drama, and it is safe to say that the Loebs and the Robbinses of the world are just watching this one from afar... and gloating. Sphere: Related Content
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