Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

Total Return Swaps TRORS

Here is a good introductory article on the subject of Total Return Swaps. There are several reasons an institution might utilize these financial vehicles and one of the main reasons is leverage. In entering a swap agreement, one party agrees to allow another party to "borrow" a security in return for a set payout (usually some rate of interest). The other party effectively takes a long position without actually owning the underlying security, thereby preserving liquidity and increasing leverage. They have effectively rented the underlying security and will participate in the upside of the security that is over and above the rate of interest paid in order to borrow it. At the end of the term the borrower may agree to purchase the stock, enter the borrowing ageement again or move on to another trade.

By using TRORS, back in January 2009, Bill Ackman and Pershing Square cobtained exposure to 52 million shares of General Growth Properties (GGP) in addition to the 22 million it beneficially owned.

http://www.financial-edu.com/total-return-swap-trs.php