H F arbitrage strategies

[ibrahim-1987]

hi david,

1. page "69" there is a note of a learning spreadsheet, but i didn't find it on HOW -TO.

2. page "72" , when merger fails, " loss on short position company A = $250!
if price is 100, then the loss will be : (98-100) * 50 = -100!??

3. page " 84" : " leveraged recap........ as they add debt to the company, REDUCE the value of overall debt"... how it reduce the value of overall debt?

thank y

 

[David Harper CFA FRM]

Hi Ibrahim,

1. Some of the new learning spreadsheets lag (I have to finish the videos first), but they eventually appear
2. Yes I agree, it looks like a dumb mistake on our part. Apologies. We will issue a revision. Thank you for spotting and alerting me.
3. By making the debt riskier (Stowell's source text is below). For example, $100 in zero coupon face value debt at 5% has price (PV) of $100*exp(-5%*10) = $60.7. Now add $30 in debt. If the rate is unchanged, of course value goes up, but if additional debt burden increases risk such that rate goes to 8%, then PV of $130*exp(-8%) = $58.8. I hope that helps.

THANK YOU

"A leveraged recapitalization of a private equity fund portfolio company involves the issuance of debt by the company some time after the acquisition is completed, with the proceeds of the debt transaction used to fund a large cash dividend to the private equity owner. This action increases risks for the portfolio company by adding debt, but enhances the returns for the private equity fund. Although the providers of debt in a leveraged recapitalization are undertaking considerable risk, they are generally paid for this incremental risk through high interest payments and fees. However, the new debt can cause the value of outstanding debt to decline as the company's risk profile increases. The other stakeholders that can be harmed by leveraged recapitalizations are employees and communities. If the increased leverage results in destabilization of the company because of inability to meet interest and principal payment obligations, employees can lose their jobs (and, potentially, their pensions) and communities can lose their tax base if the company is dissolved through a bankruptcy process" - Stowell

 

[ibrahim-1987]

thank y david