| We talked on Monday about the proposed merger between DirecTV and Dish Network, in which DirecTV will pay $1 for Dish and also assume its $9.75 billion of debt. Except not quite: The deal is contingent on the holders of that debt agreeing to get paid back less than $9.75 billion. Either they collectively agree to accept $1.568 billion of haircuts (that is, cut the debt to about $8.2 billion), or the deal is off. Effectively DirecTV wants to buy Dish for less than zero dollars; Dish's bondholders have to agree to pay DirecTV $1.568 billion to take over the company. Will they? Well, Dish's bonds were trading at somewhat distressed levels before the deal, so they might. On the other hand, after the deal was announced, the bonds traded up above the proposed deal price, so they might not. Bloomberg's Reshmi Basu and Jill R Shah report: Creditors to US satellite television firm Dish Network plan to block a distressed exchange that's a key part of its tie-up with rival DirecTV, according to people familiar with the matter. A group of steering committee investors has gained a blocking position in order to negotiate with the company, the people said. They may even explore a better outcome through litigation, said some of the people. Creditors are banding together after Dish and DirecTV agreed on Monday to create the biggest US pay-TV provider under the control of private equity firm TPG. Before the plan can go ahead, Dish needs consent from its bondholders to exchange old debts for notes issued out of the new combined entity. The debt restructuring plan would leave bondholders with nearly $1.6 billion of losses, after imposing haircuts as high as 40% of face value. … Those who support the restructuring point out that Dish is providing a coupon bump to consenting lenders and a premium to market trading levels before the deal was announced. The combined entity will also carry less debt, have higher ratings and generate more cash, according to these people who also declined to be identified because the discussions are private. As speculation around a Dish-DirecTV merger swirled, Dish bonds rallied last week on the hopes that a deal would be favorable to creditors. Though they've since given back some gains, some of the bonds are still trading above the proposed exchange price, which is where investors see a chance for sweetened terms.
Also, last week, Dish announced that it had "engaged in negotiations with certain holders" of some bonds about exchanging them for new bonds at a haircut to their face value (but a premium to their market trading prices), but they "did not reach an agreement with respect to a transaction." Presumably last week Dish wasn't telling the bondholders about the potential merger, but the point is that it recently tried the "hey would you take a haircut on your bonds?" approach and the bondholders said no. By the way: Dish is currently owned by EchoStar Corp., Charlie Ergen's public company. DirecTV is currently majority-owned by AT&T Inc., another public company. TPG Inc., the private equity fund, owns the other 30%. As part of this deal, TPG would buy out the rest of DirecTV for cash, and DirecTV would then acquire Dish, so TPG would end up owning all of it. You could have a crude model that is like "a large part of the value created by private equity consists of taking value from creditors, and the crucial skill of a private equity firm is negotiating fiercely with creditors." When we have talked about liability management transactions — where companies reduce their debt burden by extracting value from one set of creditors to give to another — I have quoted a Diameter Capital Partners note saying that those deals "should really be thought of as sponsor-on-creditor violence, with select creditors being offered a choice between being killed or doing something about it." Diameter didn't say "company-on-creditor violence"; it said "sponsor-on-creditor," because everyone understands that the private equity sponsors are the tough skillful repeat players in this business. So you kind of see the trade here, right? You are a public company, you have some bondholders, you would like to renegotiate your debt. You call them up and say "hey can we give you 65 cents on the dollar" and they say "nope." Then you get a call from a private equity sponsor who sort of cracks its knuckles and says "we know how to deal with bondholders, we can probably get them down to 60 cents." And so you sell the company to the sponsor for $1, because the sponsor can make the company worth more — by making the bonds worth less — than you can. I just want to emphasize how weird this is. Here are some trades you can do: - We sign an agreement saying that you will sell me one million shares of XYZ stock for $100 each a year from now. That is, in a year, I will pay you $100 million, and you will give me the million shares. This is commonly called a "forward," but we could with reasonable accuracy call it a "physically settled total return swap." No money changes hands now: $100 is the fair price for this stock, so I don't pay you for this contract, and you don't pay me.
- We sign an agreement, called a "put option," giving me the right, but not the obligation, to sell you one million shares of XYZ for $95 each a year from now. That is, in a year, if XYZ is below $95, I will give you the million shares and you will give me $95 million. If XYZ is above $95, we won't do that, because I'd rather keep the stock. I pay you some money now for this option.
- We sign an agreement, called a "call option," giving you the right, but not the obligation, to buy one million shares of XYZ from me for $105 a year from now. That is, in a year, if XYZ is above $105, you will pay me $105 million and I'll give you the million shares. If XYZ is below $105, we won't do that, because you'd rather keep the money. You pay me some money now for this option.
Each of these trades is very normal. The combination of Trades 2 and 3 — the put and call — is also very normal; it is called a "collar." (Often it is structured so that the money I pay you for Trade 2 exactly offsets the money you pay me for Trade 3, so no money changes hands now.) It is a way for me to hedge my exposure to XYZ: If the stock goes down a lot, I can't lose more than 5%, but in exchange I can't make more than 5% if the stock goes up. (The actual width of the collar is negotiable; perhaps we'd rather do $90 and $110, or $80 and $120, or $99 and $101.) The combination of all three, though, is a little weird. Think about what happens in a year if we do all three trades: - If the stock is below $95, I buy it from you at $100 (the forward, Trade 1) and sell it to you at $95 (the put, Trade 2). The net result is that I pay you $5 million and get no stock. (You also get no stock, since you also buy and sell exactly offsetting amounts.)
- If the stock is above $105, I buy it from you at $100 (the forward) and sell it to you at $105 (the call). The net result is that I get $5 million and no stock. (Again, you also get no stock.)
- If the stock is between $95 and $105, I pay you $100 million and get a million shares of stock (Trade 1), and the collar doesn't matter. If the stock is at $103, I get a bit of a good deal on the stock: I pay $100 million for stock worth $103 million. If the stock is at $98, I get a bit of a bad deal: I pay $100 million for stock worth $98 million. But I never make or lose that much money, because the collar takes care of the extreme cases.
Essentially this combination is, for me, sort of a very low-leverage bet that the stock will go up. If the stock goes up, I will make a bit of money, capped at 5% of my notional investment ($5 million on the $100 million I commit to the trade). If the stock goes down, I will lose a bit of money, floored at 5%. If the stock stays flat, I will pay $100 million to get roughly $100 million worth of stock. Fine, whatever, people make bets. But let me ask this question. If we actually did these three trades today — if I bought the stock forward, bought the put and sold the call — would you say that I bought the stock today? I mean, I didn't literally buy the stock today, but have I done something roughly economically equivalent? No, right? I have very little economic exposure to the stock: If it goes up a lot, I won't make much money, and if it goes down a lot, I won't lose much money. More to the point, let's say a year goes by and I really want to own the stock. Did doing this trade help me? Not really? Again, consider the three possibilities: - If the stock is below $95 in a year, I pay you $5 million, I get no stock, and I have to go buy the stock. I pay whatever the price is — say it's $80, so I pay $80 million — for a net cost of $85 million.
- If the stock is between $95 and $105 in a year, these trades get me what I want: I pay you $100 million and get the stock. My net cost is $100 million, regardless of whether the stock is at $98 or $100 or $103.
- If the stock is above $105, you pay me $5 million, I get no stock, and I have to go buy the stock. I pay whatever the price is — say it's $140, so I pay $140 million — for a net cost of $135 million.
That is: When you combine the three trades (forward, put, call) with a need to get the stock in a year, the total trade is sort of a low-leverage hedge against the stock going up. If the stock goes up, I will have to buy it at the market price, but I'll get roughly a 5% discount. If the stock goes down, I will get to buy it at the market price, but I'll have to pay roughly a 5% premium. If the stock stays flat, I will buy it at the fixed price of the forward, which is close to the market price though not quite. I have done very little to lock in today's price; if, in a year, I really need to buy the stock, I will mostly have to pay whatever the market price is. I don't know. Last week I wrote sort of a weird column about UniCredit SpA and Commerzbank AG. UniCredit has been mulling a run at taking over Commerzbank, and as part of that mulling it had bought some Commerzbank stock in the open market, and via derivatives, and in an auction of part of the German government's stake. And then there were some big stories about how "UniCredit SpA Chief Executive Officer Andrea Orcel moved to more than double the lender's stake in Commerzbank AG," buying derivatives to add about 11.5% of Commerzbank to the 9% it already owned. And I wrote: Well, did it? If you looked at UniCredit's disclosure, what it said is that it had bought the stock via derivatives, but also hedged the stock via derivatives, and I pointed out that those trades offset. I wrote: It's not much of a transaction! You buy stock on swap because you want economic exposure to a stock without owning it. You hedge a stock with a collar because you want to own the stock without much economic exposure. When you combine those transactions you get not owning the stock and not having much economic exposure to it. (In particular, if Commerzbank's stock doubled, would UniCredit have to pay more than today's price to acquire that 11.5% stake? It would if it has collared the stake.) Why would you do that? What is the point of owning the stock on swap and hedging it? Well. This is the most efficient way to accurately tell everyone that you have bought 11.5% of the stock. … Doing this lets you announce a 11.5% stake whenever you feel like it, which is nice if you are, for instance, trying to build public pressure to acquire the company.
That was all sort of speculative and it was possible that I had completely misinterpreted what happened; at least one reader emailed to argue that UniCredit probably hadn't collared its Commerzbank stake. But today the Financial Times published an "Anatomy of a trade: how UniCredit built its Commerzbank stake" and here you go: At the core of the transaction are contracts UniCredit entered with Barclays and Bank of America, according to voting rights disclosures and bankers familiar with the deals. Both investment banks struck so-called total return swap agreements with UniCredit, in effect committing to replicate the economic performance of Commerzbank's stock. If the German lender's shares go up, or the bank pays its dividend, the counterparties will pay the change in value to UniCredit. If the stock goes down, UniCredit must cover the difference. Barclays and BofA also committed to physically deliver the Commerzbank shares to UniCredit later, should the Italian lender still want them. While the banks have bought a few Commerzbank shares directly, they hedged their trade mostly through put and call options, according to disclosures. … Total return swaps can come with risks. During the 2008 financial crisis, large drops in VW and Continental shares left Porsche and Schaeffler Group exposed to huge losses when their derivative stakes lost billions of euros in value. Orcel has eliminated that risk with another layer of financial engineering, said people familiar with the transaction. He is using a so-called collar to hedge the Commerzbank position against share price declines, while also waiving large parts of the upside. The structure — consisting of opposing call and put options — in effect locks in last week's Commerzbank share price.
I just feel like a crazy person reading this? I mean, I have done approximately the same trade as Orcel: - I am not exposed to any risk of a decline in the price of Commerzbank stock, because I don't own any.
- I have waived the upside in Commerzbank stock, because, again, I don't own any.
- If, in the future, I want Barclays and BofA to deliver Commerzbank stock to me, they will, because they are in the stock trading business and will happily sell me some Commerzbank stock at whatever the market price is at the time.
- Barclays and BofA have not bought much Commerzbank stock to hedge the possibility that they will need to deliver me the stock in the future, because if I call them up later and say "I'd like to buy Commerzbank at the market price" they can just go out and buy it then.
Similarly, in raising UniCredit's reported Commerzbank stake from 9% to 21%, Orcel has managed to (1) not buy any Commerzbank stock, (2) keep open the possibility of buying some Commerzbank stock later and (3) not particularly lock in the price he will pay later? "'Think what you may but this is just beautifully done,' said one Frankfurt-based banker" to the FT, and I can't really disagree. In general, you would rather make more money from a customer than less. You'd rather make a fair amount of money than a tiny amount of money, you'd rather make an excessive amount of money than a fair amount of money, you'd rather make an astonishingly excessive amount of money than a normal excessive amount of money. There is, however, some cap. If you make too much money from a customer, the customer will call you up and say "ah come on, give us that money back." And you might say "oh fine this is too much money, here, have it back," but you might instead say no, because you like money. And then the customer will sue, and the lawsuit will say in essence "ah come on, they made so much money from us, that can't possibly have been on the up-and-up." And that argument is pretty effective. Maybe the customer will win the lawsuit, and a jury will say "ah come on, you made too much money, give it back." Or maybe your legal agreements are ironclad and the customer will lose, but the publicity of making too much money from the customer will be bad for business. It is not a good look, for your other customers, or for your regulators, if you are making too much money from customers. I have some familiarity with this point because of my former career as a derivatives structurer at an investment bank. Pricing of over-the-counter derivatives is pretty opaque — the customer doesn't just pay you a negotiated fee — and there are lots of levers you can use to make more money on a trade. Some derivatives customers are very sophisticated and will bid everything out and fight you on price down to the last basis point; other customers will pay you any number you want. The latter customers are great! You will want them to pay you a large number! But not too large. In the general case there does not seem to be a lot of science to deciding how much is too much. If you find yourself emailing your colleagues "hahaha we really ripped those muppets' faces off," probably it was too much, though also probably keep that off of email. Maybe send that as a text on your personal phone, hahaha just kidding definitely don't do that. We have talked a few times recently about sports betting, where US legal online sportsbooks are relatively lightly regulated and so have a lot of freedom to (1) discourage "bad" customers (ones who win a lot) and (2) encourage "good" customers (ones who bet a lot and lose). "Good customers," in this sense, means something uncomfortably close to "gambling addicts." And so if you are a legal sportsbook you will have a business model built on getting repeated large bets from people who mostly lose, but you will also have policies designed to discourage gambling addicts from using your services. And those policies and that business model will be in uncomfortable conflict. People who lose a lot of money are your best customers, in that they provide a lot of your money, and also your worst customers, in that they are bad for your public and regulatory relations. And sometimes they sue: FanDuel Inc. was sued by a former Jacksonville Jaguars executive who admitted to stealing more than $22 million from the team, but says the website knew he was an addicted gambler and offered him more than $1 million in credits and "lavish" gifts to make sure he continued to place bets. The complaint by Amit Patel, who pleaded guilty in December and was sentenced to 78 months behind bars in March, alleges that FanDuel ignored its own responsible gaming protocols and "actively and intentionally targeted and preyed" on him with incentives to feed his addiction. The suit in federal court in New York is seeking more than $250 million in damages. … In his suit, Patel says that he gambled more than $20 million on FanDuel between late 2019 and early 2023 and was given VIP status in 2021. He was then assigned a host who communicated with him constantly and lured him to gamble more with "relentless financial incentives, lavish trips, event tickets and other gifts" — including more than $1 million in FanDuel credits and all-expenses-paid trips to a Formula One race in Miami, the college football national championship game and the Masters golf tournament.
Yes right someone with the capacity and desire to lose $20 million on a sports betting website is an incredibly attractive customer, and paying him $1 million of credits and incentives to keep his business is a high-return trade. The long-run value of doing that is more ambiguous though. Here is the complaint. I have no idea how well it will work, and I am not sure that a guy who stole $22 million to bet on sports is all that sympathetic a plaintiff. On the other hand, I mean, you can't really argue that he wasn't a gambling addict; in some ways the fact that he's in prison for it makes his case stronger. One intriguing argument suggests that, because FanDuel did not do enough to check to make sure that he wasn't gambling with stolen money, it should have to give him back the money that he stole to gamble on FanDuel: Part of Defendants' predatory gambling practice was intentionally ignoring its own responsible gaming protocol, and knowing and/or taking intentional steps to avoid knowing that the money gambled by Plaintiff was stolen or otherwise not from a legitimate source. Defendants circumvented its own Know Your Customer (KYC), anti-money laundering (AML), and customer due diligence (CDD) standards and requirements -- again to ensure that Plaintiff continue depositing and gambling in massive amounts and frequencies. … In or about early 2023, the Defendants' identified one or more of the Plaintiff's transactions as suspicious. … Plaintiff's VIP host informed Plaintiff that Defendants' AML department required a verification of his source of funds. Days later, and without Plaintiff providing verification of any kind, Defendants informed Plaintiff that "Defendants got around it" and "you owe me big time" or words to that effect, and that Defendants were no longer requesting verification. … Defendants knew, or at least suspected and took steps to intentionally ignore, that the Plaintiff was using a corporate credit card to make frequent massive deposits with Defendants.
This argument is interestingly generalizable: A lot of financial institutions (including, for these purposes, FanDuel) really do have obligations to check that the money their customers deposit is not ill-gotten, but I don't think I've ever seen these obligations used for the benefit of the customer. If you put a lot of money in an online brokerage and then lose it all trading options, can you get it back by saying "oh I got that money from dealing drugs and you didn't check, so you really weren't allowed to take it"? Also there is a personal cell phones angle: The Plaintiff's preoccupation with gambling, including but not limited to engaging in as many as 100 text messages per day with his VIP host [Brett Krause] between late 2019 and early 2023 was a fundamental and visible symptom of problem gambling. At all times relevant, Defendants were aware of Plaintiff's preoccupation with gambling through as many as 100 text messages per day with his VIP host between late 2019 and early 2023. Krause moved certain of his text messages with Plaintiff to Krause's personal cell phone to avoid detection by FanDuel's compliance personnel, while instructing Plaintiff to fabricate additional back-and-forth dialogue on his FanDuel phone to make sure it appeared to FanDuel that their communication remained frequent.
We talked the other day about how professional gamblers try to trick sportsbooks into thinking they're gambling addicts (and thus giving them more credits and higher limits) by logging in at 2 a.m. every night; I suppose texting the sportsbook 100 times a day would have a similar effect. But Patel was doing it for real. OpenAI Has Closed New Funding Round Raising Over $6.5 Billion. Lazard, King of Emerging-Market Debt, Faces a New World Order. JPMorgan Plans to Open Around 100 New Branches in Low-Income Areas. Hedge Funds That Bet Big on China Score 25%-Plus September Gains. Bain joins battle for control of world's biggest zinc smelter. Manhattan Homebuyers Are Starting to Favor Mortgages Over Cash. "Dogecoin ... has become surprisingly popular among businesses looking to accept crypto for real-world purchases." Adam Neumann's Latest Project Is a WeWork Competitor. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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