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The sting in the tail of the good times

As German media empire Kirch begins to buckle and telecom firms are again making headlines for all the wrong reasons, contingent liabilities are suddenly a hot topic for credit fund managers. What’s particularly worrying them is the number and size of put options that might force cash-strapped companies to overpay for assets.


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As put options emerge as yet another sting in the tail of an overoptimistic view of market prospects, investors are zooming in on companies that are already stretched to breaking point - among them the telecoms and some auto manufacturers. "We sold out of France Telecom in November because we were concerned about its off-balance-sheet obligations," says a rather smug fund manager. But some lower-profile names are now also looking strained.

Put options are nothing new. It is fairly common for companies to come to an agreement over profit sharing when transferring assets between them, for example. When the business being sold is likely to grow fast, rather than the buyer paying a high price upfront the seller may retain the rights to some of the expected equity upside. Or a transaction might be staggered so that the change of ownership takes place in two or three stages - as Pinault Printemps Redoute agreed with Gucci - often with the price established in advance.

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