“You never get the perfect hedge, but if I kept the parameters I always believed in...I would have been fine,” he said. “But I didn’t.”
Icahn Enterprises, the listed vehicle majority owned by the activist that allows retail investors to join in his wagers, reported a total of US$4.3b in short losses in 2020 and 2021 as markets quickly rebounded from the pandemic slump following the Federal Reserve’s huge stimulus.
“I obviously believed the market was in for great trouble,” Icahn said. “[But] the Fed injected trillions of dollars into the market to fight Covid and the old saying is true: ‘don’t fight the Fed’.”
The trades have left Icahn in a vulnerable position and threaten to undermine his status as one of the most feared activist investors on Wall Street.
Earlier this month, short seller Hindenburg Research released a report saying it believed the market value of Icahn Enterprises was inflated and its dividend was unsustainable. Shares of the company have fallen more than 30 per cent since the report was published.
As Icahn’s short bets drained billions of dollars from his investment company, he ploughed nearly US$4b of his own money into his publicly listed vehicle, filings show. That injection helped keep the group’s internally calculated investment portfolio value relatively stable.
Icahn exposed himself to another risk by taking out a margin loan that was first disclosed in early 2022. Hindenburg’s report drew attention to the margin loan from Morgan Stanley, against which Icahn pledged 60 per cent of his stake in Icahn Enterprises as collateral.
Hindenburg argued this could lead to his business unravelling if the plunging stock price triggers a margin call that would force Icahn to liquidate some of his stake.
In a statement earlier this month that addressed Hindenburg’s allegations, Icahn Enterprises said Icahn was in “full compliance” with regards to all personal loans and announced a US$500 million stock buyback authorisation in an attempt to bolster its share price.
With regards to its market valuation, the company said that “over time, [our] performance will speak for itself”.
Icahn told the FT that he had used the margin loan to make additional investments and had billions of dollars of cash outside of his public vehicle.
“Over the years I have made a great deal of money with money,” he said. “I like to have a war chest and doing that gave me more of a war chest,” he added, referring to the margin loan.
Icahn Enterprises has warned that “a prolonged decline” in its stock price “could increase the likelihood of a foreclosure or forced sale” of Icahn’s stake if he was “subject to a ‘margin call’”.
Earlier this month, Icahn Enterprises revealed federal prosecutors in New York had contacted the company seeking information on its business, including corporate governance, valuations and due diligence.
Icahn’s bearish bets are the main reason his investment portfolio has lost money in every year since 2014. Over the roughly six-year period that he lost US$9b on the short bets, the portfolio made about US$6b from his activist wagers, leaving the vehicle with an overall investment loss of nearly US$3b.
Separately, Icahn Enterprises generated US$3.5b of gains during the period by selling companies it controlled — including casinos and a railcar leasing business — that were held outside the investment portfolio. The net asset value of Icahn Enterprises fell from US$7.9b in 2017 to US$5.6b this month. That poses a potential problem for Icahn, who has historically taken the large US$8 a share annual dividend in stock rather than cash.
This has caused the number of outstanding shares to more than double over the roughly six-year period, pushing its net asset value per share down from US$33 to roughly US$16. Retail investors who took their dividends in cash would have received more than US$40 a share during the same period.
As pressure on his group mounts, Icahn has been forced to rein in his short bets just as some investors fear that a regional banking crisis and the debt ceiling stand-off could result in a sharp market sell-off.
“I still to some extent believe that this economy is not good and there are going to be problems ahead,” Icahn said. “We are still hedged, but not to the extent we were.”
Written by: Antoine Gara and Ortenca Aliaj
© Financial Times
