Porsche: the car maker turned to hedge fund now in financial trouble

While 2008 was a great year for Porsche as reported in the following two posts, it looks like the massive leverage and risk that they took on speculative positions (mostly call options on Volkswagen) is now bringing them big trouble. As I previously noted, Porsche is not a car maker in my opinion anymore, since speculation on the stock market seems to generate more profit for the company than the actual sales of cars. And as you will see down the article, they seem to have done quite a bit of risky speculative trades, like writing put options (selling puts) to raise cash to buy call options! And then, they have about 10 billion of "other liabilities" they won't comment about...
May 26 (Bloomberg) -- Porsche SE, struggling to combine with Volkswagen AG, is in danger of losing some of the 17.3 billion euros ($24.3 billion) in profits recorded from holding VW options because it may not have the money to exercise them.

Porsche bought options and Volkswagen stock for more than three years and controls more than 70 percent of Europe’s biggest automaker. Now, Stuttgart, Germany-based Porsche may be unable to raise the money needed to cash in the options, according to research by Sanford C. Bernstein & Co., Sal. Oppenheim jr. & Cie. and FAIResearch GmbH & Co.

The 78-year-old maker of the 911 sports car piled up more than 9 billion euros in debt and hasn’t been able to raise the financing even after the options contracts surged in value along with the sevenfold gain in VW shares since 2005, according to the analysts [...].

“The smartest guys in the room are running out of options,” Max Warburton, a London-based analyst at Bernstein, said in an e-mailed message May 19. “We no longer believe Porsche is in a position to control the VW share price and are increasingly convinced that the VW ordinary shares will collapse.” [...]

Since 2007, Porsche has reported profits from VW options of 17.3 billion euros, according to its financial statements. The gains were booked as VW shares jumped 648 percent from 33.35 euros at the start of 2005, the year Porsche started buying its stake, to 249.45 euros at the end of January 2009.

The bulk of the earnings are on paper, said Gaube, the spokesman. As VW shares rose, so did the value of the options. Porsche has added the amount by which the options increased to its income statement, according to the company. Under so-called mark-to-market accounting rules, the profit would be reversed on the income statement as a loss if the options’ value fell, Gaube said. [...]

Porsche received a credit line from Volkswagen that expires in September, Bamler, the Porsche spokesman, said yesterday. He wouldn’t provide the size of the loan. [...]

Porsche Supervisory Board Chairman Wolfgang Porsche is struggling to raise money to buy more Volkswagen equity, according to Bernstein and FAIResearch. [...]

Porsche’s latest financial report shows 9.64 billion euros in “other liabilities,” without giving more details. Gaube, the spokesman, declined to comment on them.

Hans-Peter Wodniok, an analyst at FAIResearch in Frankfurt, and Warburton at Bernstein said some of the liabilities are probably puts on VW shares that Porsche issued and sold to finance the purchase of the calls.

Christian Breitsprecher, an analyst at Sal. Oppenheim in Frankfurt, said Porsche’s challenges may mount should it let the calls expire. That may spur banks that underwrote the calls to sell VW common shares they bought as insurance, lowering the stock.

“You just walk away from the calls,” said Breitsprecher. “It only becomes a problem when you’ve also written puts.”
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