Levine on Wall Street: Game Theory and Appraisal Arbitrage

Also: CVR artibrage, vault cash ETFs, and dot diagrams of corporate values.


Much has been made of the practically dubious fact that new Greek finance minister Yanis Varoufakis is an expert in game theory, but where do you think he learned this?

“Debt will be rendered sustainable, even if we replace haircut with euphemisms and swaps,” Varoufakis tweeted from his personal account. “No U-turn!”

That's a reference -- I guess? -- to the fact that yesterday Varoufakis unveiled a plan "for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders," which does not quite match earlier rhetoric of debt haircuts. Or does it? The game appears to be to persuade creditors that it isn't a haircut (look at your shiny new growth-linked bonds!), while persuading Greeks that it is (look at our lower debt service costs!). That ... that's fine, conceptually, persuading both sides that they're getting what they want is a time-honored strategy, as is swapping debt for equity. But shouldn't you not tweet about it like that? I mean, calling something a "euphemism" doesn't exactly make it palatable? People can read those tweets you know. Greek bonds are tighter and stocks are way up on the plan, so there's that. Here is Dan Davies looking at cash flows rather than euphemisms, and coming to a rather different conclusion from Varoufakis's.


Last week there was an important Delaware Court of Chancery decision that "confirms that the merger price resulting from a comprehensive, arm’s-length sales process will be accorded substantial weight in Delaware appraisal proceedings." Appraisal is the legal process by which, if you don't like a cash merger, you can sue and ask a judge to decide how much your shares were worth, and then the judge can make the buyer pay you that amount. Most of the time, though, if there's no chicanery, the shares are worth what the buyer paid for them, and so you should just get the merger price.

On the other hand, you get that price plus interest at 5 percent over the discount rate, which, combined with the possible upside of convincing a court that the company was worth more than it sold for, can make appraisal look pretty tempting. And so Merion Capital, "the largest player in appraisal arbitrage," is leading a group of hedge funds seeking appraisal in the Safeway sale. And here is a story about the contingent value rights issued in that deal that you will enjoy if, like me, you enjoy stories about contingent value rights. 

Elsewhere, Carl Icahn doesn't just want to get companies to spin off businesses; he wants the businesses spun off without takeover protections. Which, obviously, fine, activist investors and takeover protections are natural enemies, and it's understandable. Still you don't have to be too cynical to point out that Icahn did all that work to convince eBay that PayPal should be an independent business, only to immediately decide that PayPal should be acquired by someone else. 


Speaking of activism, Bill Ackman's Pershing Square won't be too active in the near term, because it is light on cash. And here is a story about investors who "supported the most activist-investing campaigns last year," with BlackRock, the Florida State Board of Administration, TIAA-CREF and AllianceBernstein near the top of the list. It's a pretty mainstream list, which suggests that any image of activists as swashbuckling weirdos is a little outdated.

Elsewhere in swashbuckling, Steve Schwarzman has "begged, literally begged," his young apprentices not to run off to start their own firms. "I've had people come over to my house on Saturday," he says, and I feel like if he really cared he'd go to their houses? Anyway, "this is not Silicon Valley, where failure is an option," says Schwarzman, in not a very good sales pitch for Blackstone or the financial industry in general.

Elsewhere in sales pitches, here is Point72's website. Here's the leadership team of 21 men and 2 women (in community matters and investment talent development). Here are the mission and values, and there are actually little dot diagrams of the values -- a circle for "Community," three boxes of increasing size for "Growth & Development," and a sort of weird squashy thing for "Ethics & Integrity." Elsewhere in weird squashy things, here is a video that TPG made, set to a Coldplay song, "documenting a day in the life of the firm."

Interest rates.

Why would you buy government bonds with negative yields? Well here are no fewer than six reasons from JPMorgan: You might expect deflation, currency appreciation, or capital gains from quantitative easing; or you might be a central bank, an indexed or passive fund, or a bank escaping negative deposit rates.

But here is a proposal for a Vault Cash ETF, which really ought to provide a floor on deposit rates (of somewhat below zero, since you have to rent the vault). One useful attribute of the Vault Cash ETF is that it is a good test of leverage-ratio intuitions. (I mean, not in literal exchange-traded-fund form, but hear me out.) You have a thing. It issues $1 million in liabilities, and promises a return of negative 0.2 percent on those liabilities. It invests $2,000 in vault rental, and $998,000 in crisp $100 bills that it puts in the vault. What is that thing's leverage ratio? What should it be?

Elsewhere, the New York Fed "plans to alter the way the U.S. central bank’s main policy rate is calculated to include a broader range of transactions," including directly negotiated as well as brokered trades, and will also "begin publishing an 'overnight bank funding rate' that includes both fed funds and eurodollar transactions."


If you can't get a highly levered loan from a bank, where can you turn? The answer appears to be KKR & Co., though it might charge you 15 percent interest and a 40 percent equity stake. But what else can you do?

“This is a unique time for firms like KKR,” said Brad Hintz, an adjunct professor at New York University’s Stern School of Business and former investment-banking analyst at Sanford C. Bernstein & Co. “The large banks are being controlled by the regulators and are operating under the goal of reducing risk. If you are a corporate treasurer with less-than-stellar credit and are looking for an aggressive deal, you are going to need to look outside those banks.”

Regulators don't want banks making loans above a leverage threshold of six times earnings before interest, taxes, depreciation and amortization, but the focus seems to be on the banks, not the loans: If non-banks make the loans, they're fine.

KKR isn't the only private equity firm investing in leveraged loans, though. Here is a funny story about Apollo buying a big chunk of the loans backing its own buyout of Presidio Holdings. Don't you feel like someone is wrong there? Like, assume Apollo bought all of the loans. That just means Apollo is buying the thing unlevered. But presumably the math that the buyout guys did depended on some leverage assumptions? I realize that it's different funds, but still, it's a little weird.

Elsewhere in non-banks making loans, BlackRock is doing a peer-to-peer securitization, because I guess someone has to? And "SoFi, the peer-to-peer lender that specialises in student loans, has raised $200m in a financing round that values the four-year-old start-up at $1.3bn ahead of its upcoming initial public offering."

And in bonds, Apple sold a bunch of them. Here is speculation that Apple is top-ticking by selling bonds now just before interest rates go up, but, I mean, presumably the buyers have views on interest rates too? And Nomura is cutting back on U.S. investment-grade corporate bond trading.


Here are two big Bloomberg retrospectives, an oral history of the rise of Chipotle and a regular history of the demise of RadioShack. This all makes me feel very normcore because I've eaten at Chipotle like a thousand times, but I went into RadioShack like twice to buy cables or something. I am obviously not alone: "RadioShack Corp. is preparing to shut down the almost-century-old retail chain in a bankruptcy deal that would sell about half its store leases to Sprint Corp. and close the rest."

Things happen.

Judge Jed Rakoff on corporate deferred prosecution agreements. Office Depot and Staples are in merger talks. Google is building an Uber. Head of McKinsey Is Elected to a Third Term, and isn't it sort of surprising that McKinsey is "the largest private partnership in the world"? "The researchers found those who jogged one to 2.4 hours a week at a slow or average pace with no more than three running days in a week had the best survival rates." Jerky: the new cupcakes? Boston Consulting Group Builds Recruiting Gingerbread House. Here's What Aggravated Pimping Really Is. Strauss-Kahn trial to offer ‘great show’, says brothel owner

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    To contact the author on this story:
    Matt Levine at mlevine51@bloomberg.net

    To contact the editor on this story:
    Zara Kessler at zkessler@bloomberg.net

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