I think "vanity" is the wrong term because their existing credit rating, which they attempt to preserve, impacts all other borrowing (and possibly other agreements and finance vehicles, etc.) that they undertake.
So it's probably valuable to retain that credit rating.
The real issue here is how simple it is to game the rating agency in this way and how the market allows Meta to "launder" this activity through the ratings agency.
This is, in fact, a fairly close analogue to the housing crisis and the ratings laundering that was done with the CDOs[1]. The difference is, instead of drilling down to thousands of mortgages - each with different characteristics - you really just drill down to Meta ... which might not be too risky ...
Agreed. I know very little about financing but I’d bet if their rating fell that would trigger some debt repayment clause and the house of financial cards might wobble or fall.
…someone needs to shake the tree and see what falls out, like Peter Thiel did for SVB.
There are a lot of places where the credit ratings are hardcoded (to borrow a term) into funds. There are pension funds and other vehicles that might be bound to only invest in AA rated companies.
So if a company drops their AA rating it could force them out of a lot of funds and investment vehicles.
This complicated vehicle where the debt and assets are in another LLC isn’t actually tricking anyone in finance. If you’re reading about it from blogs then it’s already common knowledge. The structure isn’t actually a one way trick, it’s a set of tradeoffs and protections for the company. They probably could have achieved better terms going direct but with higher risk.
Surely the ratings agency people are "in finance"? Or are they in on the game, and sliding their way back to 2008, writing ratings for "deals structured by cows"?
They're not being "tricked" in the way these sensational substack posts would like us to think. You're not being given some secret knowledge that the ratings agencies don't have.
The mistake throughout this comment section is to assume that the debt is functionally equivalent to Meta haven taken it on themselves, consequences and all. It's not.
Putting things in an LLC vehicle provides some protections. Both for large corporations and you and me as individuals. However if you put an asset in the LLC the lenders also know that those protections exist and will adjust terms accordingly. Meta has taken this into account, found some favorable terms, and pursued that direction.
The narrative that this is a secret loophole that lets them take on debt but also not take on debt is the substack authors doing their thing to make it more sensational than informative.
Is anyone actually limited to only AA+? The usual meaningful separation is investment grade (AAA, AA, A, and maybe BBB) vs junk (everything else). (I don't think Meta would meaningfully lose access to credit if they were downgraded to A.)
Instinctively I try and simplify things. It this was a person with an excellent credit score, it’s as if the person is taking on extra debt to start to create something they need, but trying to hide it.
But that simplification isn’t the whole story. If that person took on debt as part of an LLC they started, not their personal bank account, then they have certain protections in the event of default of the LLC.
They will also have to pay a premium and give up more for debt to the LLC because the lenders know this.
The same is true for Meta.
The finance world isn’t blind. None of us hear are stumbling upon hidden knowledge that the lenders didn’t already have.
