Volkswagen hit as LTCM offloads preference shares

LONG-TERM Capital Management has secretly offloaded a long line of preference stock in Volkswagen, the German car giant, in the last few days, writes Andrew Garfield.

As a result of the sales, which were to cover a large short position in the company's ordinary shares, the value of the preference shares has halved since last week.

The sale has adversely affected the spread between VW preference and ordinary shares. Preference shares normally trade at around 1.2-times the ordinary shares, but were trading at 1.7-times yesterday. The sale has also had a knock-on effect on VW ordinary shares, which fell Dm7.5 to Dm116.5, a drop of 6 per cent.

The fall is the latest evidence of the dislocation being caused by the unwinding of the $100bn of market positions held by LTCM before it was bailed out a month ago. Arbitraging between VW's preference and ordinary shares was a common strategy among German speculators. But it appears that here, as elsewhere, LTCM had cornered the market.

Gilt yields have fallen sharply in the UK because of heavy buying by LTCM and other hedge funds. The gilts are needed to cover sterling swaps positions which LTCM is trying to close out.

LTCM was known to have built equity stakes totalling $500m in various companies in the US. Because of the strict disclosure requirements operating there, most of those have been made public by the companies concerned.

The stakes were mostly in potential merger candidates such as Waste Management, Teleport and First Financial.

However, Germany's more lax disclosure rules make it easier for a speculator like LTCM to acquire stock without either the company or the general public finding out.