July 30, 2008
Is 22 the capitulation number?
So is 22 the number?
Merrill Lynch’s $6.7bn sale of a bunch of collateralised debt obligations for 22 cents on the dollar has been hailed as the long-awaited “capitulation trade” by various analysts.
In other words, this is being treated as the moment that a financial institution finally throws in the towel and agrees to shed assets at a price it knows is too low, because it cannot bear it anymore.
Wall Street certainly seems to regard it that way, having marked up Merrill’s shares since John Thain’s abrupt decision to sell.
On the other hand, 22 is still a number in the double figures so it does not count as one of the all-time bargains for distressed debt buyers such as Lone Star, the fund that did the deal.
I suppose you must discount even the 22 a bit since Merrill is providing debt financing to Lone Star to cover 75 per cent of the deal. In other words, it is being paid some cash and swapping one piece of debt for another.
Still, if one truly thinks that this is the worst financial crisis for at least 30 years, which seems fair, then surely the capitulation number should be lower?
