Dimes to Dollars: A Deal Delta Can’t Refuse
CNBC reported on Wednesday that none other than JPMorgan is reportedly going to finance the acquisition while reportedly also handling sales of other products the “Delta” refinery would produce, but which the airline would not use.
Geographic arguments aside, this seems to reinforce the notion that Delta’s credit rating is challenged enough that it may be having trouble obtaining the financing it needs to hedge using futures.
It could also suggest that Delta’s counter party risk is so high that other market participants are backing away and refusing to trade with the airline.
Counter party risk, also called default risk, is the risk a trading partner has to bear if the opposite side of the trade collapses and the other party is either unable to pay, deliver or otherwise meet the terms of a given trade, –in this case, fuel.
I’ll bet dimes to dollars, though, that JPMorgan (which has specific expertise in structured products) has got something up its sleeve in another part of the world that will help it to help Delta offset risks associated with uncertain fuel procurement costs. This is presumably why they’re involved – because they’re experts in obtaining otherwise tough financing.
If I’m correct, the terms of such a transaction are probably not too different in concept from the swaps Goldman Sachs (NYSE:GS) engineered for Greece in an effort to help that country appear like it was carrying less debt than it actually was.
Is Delta Being Set Up Like Greece?
If you recall, it was those Goldman-arranged swaps that let Greece borrow a billion euros without officially adding to its public debt. Of course, we also know that Goldman shorted Greek debt after it arranged the swaps, effectively driving Greece over the edge of the proverbial cliff by making cost-effective access to capital markets a near impossibility. And we all know how that ended….or rather, is supposedly ending.
If I were in Richard Anderson’s shoes (he’s Delta’s CEO), I’d be very nervous:
- At this point, it’s an open secret that big Wall Street houses can and frequently do trade actively against the interests of their clients.
- Fuel supplies are being restricted at a time when refineries are exiting the business. Airline stock prices have historically fallen when fuel costs rise.
- Short interest in Delta’s stock has dropped steadily from 13.8 million shares a year ago to just under 8 million shares as of March 30, 2012 according to Nasdaq.com – which is just the sort of pump priming I’d want to see as an institutional trader looking to “rip somebody’s face off.”
Not surprisingly, nobody’s talking. Delta and JPMorgan are both silent on the matter as of press time, as are the other airlines.
But stay tuned…this could get very interesting very quickly.
Oh…and hang on to your wallet.
I have a sneaking suspicion that flying anywhere on the East Coast could get a lot more expensive in the near future.