It's the mother of all margin loans

The Macquarie-Allco private equity group is engaging in a boa constrictor corporate squeeze around the necks of the 30 per cent of shareholders in Qantas who don't want to see it privatised. The message is clear enough: don't sell and risk the consequences.

For the large recalcitrant shareholders, the private equity group, Airline Partners Australia, is bargaining that by dropping the minimum acceptance condition to 70 per cent, it will take Qantas out of the all important sharemarket index and force the big funds to sell into the offer.

Large funds have to satisfy a whole series of conditions to invest in stocks: in some cases this is about liquidity levels; in others it's about index weightings.

The fact that Balanced Equity and UBS Asset Management might believe they can make more money by retaining their holdings in Qantas can often become irrelevant and this decision can be taken out of their hands by the trustees which give them the mandate to invest.

While APA has placed this intense pressure on Qantas shareholders, it cannot be assured that this will guarantee it full control of the airline.

The bidding syndicate has been forced to come up with a plan B that will allow it to proceed with the bid with minority shareholders going along for the ride.

If so, we will get our first real taste of yet another private equity structure. Another morph.

Qantas could well be owned 70 to 90 per cent by private equity with minority shareholders in there as well. As such, the group will take on many of the trademarks of a private equity owned enterprise within a publicly listed vehicle.

The reason this doesn't happen very often is that the whole modus operandi of private equity is getting control of a company that makes a lot of cash but hasn't got too much debt.

What happens next is that the new owners typically gear up the company and use the proceeds to pay themselves back for their initial investment.

In this particular case the new owners will pay in around $3.5 billion to get control and take out $4.5 billion (some from Qantas's retained earnings and some from new borrowing) over the next couple of years.

The plan is that APA will make some changes, sell some non-core assets, cut out excess costs and sell the business back into the market in five years for a handsome capital gain.

Under normal private equity deals the banks that lend the money to do all this have security over the assets of the company, which are sufficiently valuable to give the lenders enough comfort that if anything goes wrong in the plan the financiers won't lose.

The important departure from this model that APA has managed to extract is that under its plan B the financiers won't get security of Qantas assets.

As they are lending to APA - which might hold between 70 and 90 per cent of the shares in Qantas - the banks' security will not be bricks and mortar (and aircraft) but shares in Qantas. In simple terms, this represents the mother of all margin loans: the only difference between this margin loan and the usual margin loan is that it can't be called if the value of Qantas shares fall. However, if it does go pear shaped the lenders are in a mess of trouble.

For their trouble, the banks have extracted some higher lending costs out of APA but they are not particularly significant.

This seems to say two things. The banks have plenty of comfort in the growth strategy for Qantas over the next three to five years.

But, more importantly, the lenders are prepared to take on much higher levels of risk than we thought possible only six months ago. The only plausible reason for this is that there is an excess of money sloshing around in the system and intense competition among lenders to find deals.

Even if APA were able to get 100 per cent of Qantas, many consider that this was not a deal without substantial risk. At less than 90 per cent the risk profile moves up a leg.

For those Qantas shareholders that have been reluctant to accept this deal, the decision gets a whole lot harder from now on.

The mere fact that the bankers are prepared to alter their risk profile suggests that the rewards could be fabulous.

But accepting a price of $5.45 per share - risk free - is also looking particularly attractive.