In the Mail this morning, the threat to the proposed ‘ring fencing’ of the LV With-Profits fund if the acquisition by private equity plunderers Bain Capital goes ahead.
I commented earlier this week about the UK Shareholders letter to the FCA, pointing out (among other things) that the supposed ‘ring fencing’ of the WP fund that breaks down if the Bain-owned part needs capital. A bit like fencing that blows down in a gale, then?
The Mail tells how LV’s current (and potential) exposure could bring about a liquidity crisis in certain events. I told the paper “It would not take an “extreme scenario” to exhaust their liquidity, for example stagnating house prices, unexpected variations in mortality and model error.”
The firm tried to claim that it was all OK because of the low loan-to-value of the ERMs. Er, but the loan compounds up without interest paid, and the strike price of the embedded put option soon gets into the money (i.e. > 100% projected LTV) as exit date increases. Every ERM modeller knows this – why are LV claiming any different?
See the point in the chart above where the green line (present value of loan) crosses the red line (present value of receiving property).