M.L.Pee on your returns- Part 2

continues from part 1 here…

Previously, we looked at the balance sheet effects of sponsoring an MLP or REIT. Here we’ll look at how debt can be manipulated by the parent company.

To ensure creditworthiness of the MLP, which it needs in order to issue meaningful debt (which can be funnelled back to the parent), the parent has to guarantee its fiscal performance. This guarantee usually amounts to issuing letters of credit or guaranteeing debt repayment. Most companies of a certain size have revolving credit lines from which they can access debt. Usually the subsidiaries have access to this revolver as well. Now, the bank sponsoring the revolver will need additional criteria to be fulfilled for the newcomer to qualify. These criteria are where debt guarantees come from.

M.L.Pee on your returns- Part 1

This article caught my eye recently. Its admirable that Fidelity seems to be educating its customers about the various investment vehicles out there. However, the article also seems to be marketing something which is against the very basis of successful investing: follow the crowd. I’m not a huge fan of REITs and their less liquid cross industrial cousins, MLPs. Let me try and breakdown what actually goes on with the formation of such entities. Here’s a quick definition of what a REIT and MLP is.