That was a question:and this is the theory:What you think of...

That was a question:

and this is the theory:


What you think of this theory? This is just a random idea and not advice!

The AFR quotes Futuris boss as being interested in the assets of Timbercorp.

"We are interested and will be making that view known to Korda Mentha", Futuris chief executive Malcolm Jackman said yesterday.

However, FCL has quite a bit of debt it needs to re-finance and this is already reflected in the price of FCLPA which is trading around $33 today (face value $100).

How could Futuris pay for the assets? My theory is FCL may have had to raise equity anyway to take pressure of its bank re-financing concerns but, if they can dress up the equity raising in order to buy distressed assets, this would go over much better with investors. (Capital raisings to buy cheap assets are being rewarded – see SEK in AFR today); Consequently, FCL would raise equity easier, more of it - and at a higher price for the cheap Timbercorp assets. I stress this is just my theory and is a bit bizarre perhaps.

But this might justify buying FCLPA and selling short FCL on CFD basis.

My calculations suggest that a short of 50,000 FCL versus a long of around 375 FCLPA at 33 would have positive payouts provided share price FCL stays between zero and about 62 cents. Above 62 cents you lose money on the short.

The payout range neglects interest payments on FCLPA which, if they continue to pay them are at a yield of 16.8% to Jun 2011 and 24.3% per annum after the step up in June 2011 (assumes bank bills stay at 3.5%) which represents a HUGE margin over the bills. So if you include interest, the share price breakeven is much higher.

The timing of redemption is also neglected in my calculations and you have to fund the margin on CFD until both legs are closed out.


But an equity raising is in principle bearish I guess for FCL and bullish for FCLPA so idrectionally correct.

Thoughts?


Needs a CFD a/c with CMC, IG or somebody like that.