In this otherwise excellent analysis, there’s one piece missing. It’s this – nobody knows the Ts & Cs of the agreements with the private capital funds. These agreements, because they are off-balance sheet, are not described in detail and the Ts & Cs are not part of publicly disclosed SEC filings.
There are undoubtedly floors, ceilings, ratios, stock price or credit rating triggers in these agreements that can cause the PE fund to terminate and demand immediate payment. If a triggering event occurs, because these companies are now running negative cash flows at unprecedented levels, they simply don’t have the cash to pay it off and won’t be able to refinance.
And nobody, outside the borrowers and the PE lenders, knows what those triggers are.
For example, Oracle’s credit rating fell to BBB- last month. That’s the lowest investment grade rating. One more reduction puts their bonds at junk status, and if that happens many of the large pension and state/local government funds are required BY LAW to dump the bonds.
It is entirely possible that maintaining an investment-grade credit rating is part of Oracle’s agreement with their lenders. Oracle neither confirms nor denies whether a drop to junk status would trigger an acceleration event.
The silence is deafening.
Folks, I was a brand new Partner at Andersen when almost exactly this same scenario happened at Enron. I’ve seen what happens when the exotic off-balance sheet constructs fall apart. And if one or more of these guys stumble, they won’t just take themselves down – their business partners, financiers, suppliers, and yes, auditors – will go down with them.
If one of these guys craters, the market for all of them will panic. And because these few companies are such a huge part of the economy, God only knows what kind of economy-wide damage would result.
WHERE ARE THE AUDITORS???
Why Big Tech’s AI Spending Is $3 Trillion Higher Than It Seems
Ethical Bankruptcy: Gradually, Then Suddenly 
Leave a Reply