Monday, October 20, 2008

A Margin Call For An 85-Year Old Billionaire

The generally savvy financier, Sumner Redstone, may be forced to liquidate huge positions in either his controlling interest in Viacom Inc or CBS Corp, to deal with debt he owes at his holding company, National Amusements Inc.

National Amusements Inc said last week it was in talks with bankers to renegotiate terms on a $1.6 billion debt, due to a sharp drop in the value of CBS and Viacom, the collateral used on the loans.

The $1.6 billion debt was arranged by Bank of America and others. Half of that, $800 million, will need to be repaid by year's end.

At issue is a covenant that requires National Amusements to maintain a certain debt-to-asset ratio, which it failed to do after shares of Viacom and CBS plunged during the current credit crunch.

There are huge tax advantages to borrowing against a stock position rather than selling stock outright, but a Bear Market will make you hate the day you thought it was such a great idea.

1 comment:

  1. Another example of where using short term borrowing to do long term activity is coming back to bite them. As long as the short term borrowing was cheap and available it was great since it allowed you to maximize your return. But just like every other thing where you push to the limits, it also means that if the situation outside of your control changes, then the limits also change and you will not just be operating at the line, but well over it.

    Just another example of where many of the most “successful” got where they are by ignoring every rule of prudent investing. For example, you are suppose to put a significant percent of your investments for the long term, yet its not true long term investing if you are so dependent on getting massive short term borrowing that your long term investments are in jeopardy.

    Now I have no problem with people taking risks and getting rewards if they win the bet, I just don’t want to have others get the rewards and pass the loses onto me when they lose their bet. I wonder how long it will be before someone proposes “saving CBS” at the cost of taxpayer dollars or dollar holders inflation.