March 22 (IFR) - John Malone helped fund Liberty Media's
$2.6bn purchase of a 27% stake in Charter Communications this
week with a margin loan, an increasingly popular funding
mechanism in the US.
Margin loans, collateralised by the underlying stock, help
leverage returns and limit the cash funding costs of a deal.
"Margin loans are relatively new in the US. They are more
common in Europe but the technology transferred West about 18
months ago," said one equity derivatives banker.
"If you're bullish and you want to achieve an IRR target
(target internal rate of return), you can get there a lot faster
by using a margin loan."
Liberty Media on Monday entered into a definitive
agreement to purchase 26.9m shares of Charter, as well
as 1.1m warrants, from Apollo Management, Oaktree Capital
Management and Crestview Partners for US$95.50 per share, a 6%
premium at the time.
A portion of the total consideration is expected to come
from a combination of "cash and new loan arrangements", the
companies said in a statement. The purchase is expected to close
early in the second quarter of 2013.
Charter Communications shares closed Thursday at US$102.36,
7.1% above the agreed upon purchase price. Assuming a 70/30
split of cash and leverage, Liberty Media has returned about
10.3%, excluding the costs of the margin loan and any value to
In addition to levered returns, margin loans can provide the
added benefit of certainty on execution.
"Either the buyer or seller can have the financing
pre-packaged prior to closing," said a second derivatives
banker. "Having the packaging self-contained simplifies the
A seller could arrange the funding before even identifying a
Another appealing factor is that margin loans are
off-balance sheet, mitigating pressure on credit ratings from
additional term borrowings.
The lower cash consideration is certainly attractive to
private equity firms. Bain Capital, for example, used a margin
loan to help fund its purchase last April of a 30% stake in
Genpact for US$1bn from General Atlantic and Oak Hill. That kept
cash-call commitments to limited partners in addition to
"Margin loans make a lot of sense for private equity and
sovereign wealth funds on concentrated investment," said one of
the bankers. "They are secured loans to buy stock on
non-recourse basis, and provide flexibility to deploy cash
Margin loans are also used in private market transactions. A
chief executive with significant capital tied up in company
stock can margin those holdings, freeing up cash to diversify
investment holdings or purchase other assets.
Those contemplating using margin loans in the US can learn
from the European experience. Five years ago, banks were
restructuring rather than originating equity financing
transactions, particularly for Russian and Middle East clients
where the LTVs had been particularly aggressive. The business
has matured since then and comprises a significant portion of
corporate equity derivatives revenues each year.
LTVs should not be a concern for regulators in the US as
lending cannot exceed more than 50% of equity collateral - part
of the reason margin loans have been so slow to cross the
Atlantic. In the Charter Communications deal, it is expected to