Porsche outmanoeuvres the banks

Porsche is beating the banks at their own game. In the ‘go-go’ pre-credit crunch days, the banks gave Porsche an overdraft facility, whereby Porsche had the option to borrow €10bn at a cost of only 0.2% over LIBOR. The banks will now be regretting that they’d offered this credit facility.

Even though we are now in a full-blown credit crunch, Porsche is still able to borrow from the banks at 0.2% over LIBOR. It can now lend this €10bn on for a profit to any one of the desperate borrowers queuing up for some short term finance. In the extreme, Porsche could actually borrow from a bank at 0.2% over LIBOR, and then redeposit this amount at the same bank at a higher rate for an instant profit. Porsche has outmanoeuvred the banks and created its own banking profit out of the banks’ largess.

Great news for Porsche, but very bad news for the banks. The banks made these cheap credit facilities available to a vast array of their corporate clients, and there will surely be a large number of companies following Porsche’s example. The banks will be forced into lending in large size at an uneconomic rate, which is unprofitable and adds further to their bloated balance sheet, making them more financially stretched.

This borrowing at one rate and lending at another by corporates is called a roundtrip, probably the most profitable round trip taken in a Porsche! It seems that Porsche not only make the best engineered cars, but are also better financial engineers than the banks.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Richard Woolnough

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