Matthew Yglesias notes:
Trump stands to gain from an Indonesian project that got a $500 million loan right before he flip-flopped on ZTE… But it also happened the same week a Chinese state-owned company came through with hundreds of millions of dollars in loans, some of which will go to facilitate the construction of Trump-branded properties in Indonesia.
Does anyone know what the interest rate will be on this loan? After all, it is highly unlikely that the lender has given Trump’s business an interest fee loan. Let’s speculate that the interest rate is 4% per annum so Trump’s business would be paying $20 million per year in interest expenses. But how would that compare to market rates? The yield on 10-year Chinese government bonds is just over 3.7% according to this source. If Trump’s business got a 4% interest rate on a ten-year loan denominated in RMB (to be fair I do not know the currency of denomination or the term either), then the lender was assuming a AAA credit rating for this business, which sounds incredible to me. Of course it is entirely possible that the lender was receiving some sort of guarantee from the Chinese government in case Trump’s business defaults. Some tax accountant defines intercompany guarantee fees as:
With guarantees between affiliated group companies, the question arises of whether a guarantee fee must be paid to the company giving the guarantee. The credit rating of the company receiving the guarantee is also important when answering this question.
What would be a reasonable credit rating on a standalone basis for Trump’s business? Let’s also speculate that this credit rate would be no better than BB, which would likely imply that a loan on a true arm’s length basis would command an interest rate closely to 7%. In that case, the value of the loan guarantee is 3% or $15 million per year in interest savings. OK – I admit this is all speculative guesses but it does pose a reasonable means for evaluating the extent of the kick back Trump’s business got from deal.
I tossed out the 3% figure (aka $15 million per year) as a random guess. Knowing Trump’s previous business dealings where he has defaulted on debt, the true figure might be a lot higher. As Sandwichman noted – even my $15 million conservative guess is just the tip of the iceberg of the extent of self dealing by this White House.
I do not believe trump’s businesses are in the habit of taking out loans and building projects much anymore. They sell the branding to builders and take their cut.
However, their cut would not exist without the funding supplied by China so the fact they did not borrow the money themselves does not mean the loans were not a bribe.
EMichael – as they say … money is fungible. But then Mueller’s motto is “follow the money”!
Of course my motivation for this post if this does turn out to be a loan guarantee given away for free as an illegal quid pro quo, I want to be the financial economics expert hired to quantify the economic value.
I believe the loan was not directly to the Trump-branded hotels and golf courses, but to the associated theme park (not that the Trump-branded properties would be there without the park).