To all the 'free market' pumpers here... here is your free market at work:
Darth Wall Street Destroying Debtors With Credit-Default Swaps 2009-03-05 05:01:00.33 GMT
By Caroline Salas and Shannon D. Harrington
March 5 (Bloomberg) -- Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.
By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit-default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.?s high- yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.
Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody?s Investors Service projects defaults will more than triple this year and exceed the level during the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.
?Before, you really had to worry mostly about where you were in the? company?s capital structure, he said. ?Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It?s something that?s going to come up more and more.?
Six Flags Debt
Six Flags debt is rated Caa3 by Moody?s and CCC+ by Standard & Poor?s, three and five levels above default. Both rankings were put on ?negative outlook? last year. Sandra Daniels, a spokeswoman for the New York-based company, didn?t return a phone call seeking comment.
Ford, the only one of the so-called Big Three U.S. automakers to avoid taking federal bailout funds, may run up against basis traders as it seeks to restructure its debt. The Dearborn, Michigan-based car company plans to offer cash and shares to retire as much as $10.4 billion in debt, according to a U.S. regulatory filing yesterday.
It may be ?difficult? for Ford to do an exchange, in part because of investors with basis trades, said Rod Lache, an analyst at Deutsche Bank in New York, commenting before the restructuring was announced.
The parent and its Ford Motor Credit finance arm had a net $8.1 billion credit-default swaps outstanding, versus about $54 billion in bonds, according to data compiled by Bloomberg and the Depository Trust & Clearing Corp., which runs a central credit derivatives registry. Bill Collins, spokesman for Ford, didn?t return calls seeking comment.
Profit Either Way
?Say you?ve lent $100 million to a company and you had bought $100 million in credit-default swaps,? said Henry Hu, a law professor at the University of Texas in Austin. ?In that circumstance, the creditor really doesn?t care whether or not the company goes under.?
Following a meltdown last year in the relationship between prices on bonds and credit swaps after the Lehman Brothers Holdings Inc. bankruptcy, basis traders often stand to make the most money if companies default. They can also profit by holding the trade until the debt matures or unwinding the position after the market value gap between the bonds and derivatives closes.
Hedge-fund manager Citadel Investment Group LLC in Chicago and Frankfurt-based Deutsche Bank AG were among firms that piled into trades based on the spread between debt and swaps prices. Buying before the Lehman failure and the subsequent seizing up of the corporate bond market, many suffered losses and retreated.
Deutsche Bank Trades
Deutsche Bank was among those who held onto trades, forecasting the gap would close and the losses disappear, according to a person familiar with the lender?s trades.
The German bank made money by owning the debt and credit swaps of Lyondell Chemical Co., a Houston-based oil refiner and chemical producer that went bankrupt in January, the person said.
Lyondell sought and won a 60-day injunction in New York on Feb. 26 against creditors in an attempt to prevent basis traders from going after its Rotterdam-based parent, LyondellBasell Industries AF SCA, and other solvent units, documents filed in U.S. bankruptcy court in Manhattan show.
Bondholders with swaps filed objections to the ban, according to the documents. Jonathan Guy, a lawyer with San Francisco-based Orrick, Herrington & Sutcliffe who represents Deutsche Bank, said in court last month that his client owned Lyondell debt and credit derivatives.
Michele Allison, a spokeswoman in New York for Deutsche Bank, declined to comment, as did Lyondell spokesman David Harpole.
?Empty Creditors?
?You?re given these control rights under loan agreements or bond indentures on the general assumption that if you?re a creditor, you have an interest in the borrower surviving,? said Hu, who?s written about so-called empty creditors. ?Because of things like credit-default swaps, that assumption no longer holds.?
While basis traders may stymie efforts by companies to stay out of bankruptcy, they?re not Darth Vader-style destroyers, according to Brian Yelvington, a strategist at CreditSights Inc. in New York. The derivatives are bringing a measure of efficiency to the market that didn?t exist during earlier recessions, he said.
?You?ve got more information from a side of the market that didn?t exist before,? he said. ?People point at CDS causing all of this volatility. To me, it?s always been there. People haven?t been able to place the bets they would have liked.?
Creditor Resistance
Residential Capital LLC faced bondholder resistance to a debt-exchange proposal in December, in part because the investors also held derivatives, said Bradley Rogoff, a strategist at Barclays Capital, in a report that month.
With more than $2 billion in credit swaps and about $9.3 billion of bonds at the time, according to Moody?s, the Minneapolis-based company enlisted the support of only 39 percent of its creditors, falling far short of its goal of 75 percent.
During negotiations with creditors, ResCap?s Detroit-based parent, GMAC LLC, threatened creditors to initiate an asset exchange that may have left them with losses on the swaps, according to a written statement released at the time.
GMAC accepted a taxpayer bailout in late December. Beth Coggins, a spokeswoman for GMAC, declined to comment.
$47 Trillion
Credit swaps were created by JPMorgan Chase & Co. more than a decade ago to hedge against losses from bank loans. As dealers made the contracts more standardized, hedge funds, insurance companies and asset managers began using them to speculate on the creditworthiness of companies, sending trading in the swaps up to $47 trillion in 2008, according to the latest data from the New York-based International Swaps and Derivatives Association.
Richard Fuld, Lehman Brothers? chief executive officer, blamed his firm?s collapse on ?destabilizing factors? including credit-derivatives trading in Oct. 6 congressional testimony.
?People are having a hard time trusting anyone,? said Timothy Coleman, co-head of the restructuring group at Blackstone Group LP in New York. ?The motivations on the other side of the table are different.?
The combined average price on high-yield bonds and swaps dipped to as low as 85.06 percent of face value on Dec. 8, after Lehman?s failure Sept. 15, according to Barclays Capital. Two weeks before the bankruptcy, the cost was 92.13 percent, and rose to 94.12 percent as of yesterday. Investors who had done trades around the bottom would make as much as 15 percent with a default.
Distressed Debt
Idearc Inc., a Dallas-based publisher of phone directories, may come up against bondholders hedged with credit swaps, said people familiar with basis trading. The company may be forced into a distressed debt exchange or pre-packaged bankruptcy after hiring Merrill Lynch & Co. and Moelis & Co. to advise on its capital structure, Moody?s wrote in a Feb. 9 note.
Credit-default swaps protected a net $1.15 billion of Idearc debt from default as of Feb. 20, according to the Depository Trust. Idearc has $2.85 billion of bonds outstanding.
At the start of November, investors could buy the company?s 8 percent notes due in 2016 at 15.5 percent of face value. They could also purchase credit swaps protecting the bonds from default for seven years for 68 percent of face value, in addition to a 5 percent annual premium.
Gross Payout
The gross payout would be 16.5 percentage points if the company were to default. That gap has since narrowed to 5.75 percentage points, according to data from CMA DataVision and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
?We intend to look closely at all available opportunities to strengthen our balance sheet and improve our risk profile,? said Andrew Shane, an Idearc spokesman who declined to discuss specific options for the company.
In 2008, companies got investors to exchange $29.7 billion of bonds in a record 13 trades, according to Edward Altman, a professor at New York University?s Leonard N. Stern School of Business. Altman created the Z-score mathematical formula that measures a company?s bankruptcy risk.
Debt exchanged last year was more than three times the total amount from 1984 through 2007, said Altman. ?Firms appear to be scrambling to avoid bankruptcy like never before,? he wrote in his annual report on defaults, published last month.
?Defaults are one of several ways that basis holders can benefit, so it would not surprise me if names with high concentrations of basis holders encounter resistance in their efforts to restructure,? said Michael Anderson, a high-yield debt strategist at Barclays Capital in New York.
It makes me sick that healthy companies are subject to this crap as well. We need to get these CDSs on an EXCHANGE and have companies who buy them / sell them post MARGIN.
This is not capitalism, this is greed and mutual destruction for the sake of profit. Free market at work here.
Darth Wall Street Destroying Debtors With Credit-Default Swaps 2009-03-05 05:01:00.33 GMT
By Caroline Salas and Shannon D. Harrington
March 5 (Bloomberg) -- Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.
By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit-default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.?s high- yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.
Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody?s Investors Service projects defaults will more than triple this year and exceed the level during the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.
?Before, you really had to worry mostly about where you were in the? company?s capital structure, he said. ?Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It?s something that?s going to come up more and more.?
Six Flags Debt
Six Flags debt is rated Caa3 by Moody?s and CCC+ by Standard & Poor?s, three and five levels above default. Both rankings were put on ?negative outlook? last year. Sandra Daniels, a spokeswoman for the New York-based company, didn?t return a phone call seeking comment.
Ford, the only one of the so-called Big Three U.S. automakers to avoid taking federal bailout funds, may run up against basis traders as it seeks to restructure its debt. The Dearborn, Michigan-based car company plans to offer cash and shares to retire as much as $10.4 billion in debt, according to a U.S. regulatory filing yesterday.
It may be ?difficult? for Ford to do an exchange, in part because of investors with basis trades, said Rod Lache, an analyst at Deutsche Bank in New York, commenting before the restructuring was announced.
The parent and its Ford Motor Credit finance arm had a net $8.1 billion credit-default swaps outstanding, versus about $54 billion in bonds, according to data compiled by Bloomberg and the Depository Trust & Clearing Corp., which runs a central credit derivatives registry. Bill Collins, spokesman for Ford, didn?t return calls seeking comment.
Profit Either Way
?Say you?ve lent $100 million to a company and you had bought $100 million in credit-default swaps,? said Henry Hu, a law professor at the University of Texas in Austin. ?In that circumstance, the creditor really doesn?t care whether or not the company goes under.?
Following a meltdown last year in the relationship between prices on bonds and credit swaps after the Lehman Brothers Holdings Inc. bankruptcy, basis traders often stand to make the most money if companies default. They can also profit by holding the trade until the debt matures or unwinding the position after the market value gap between the bonds and derivatives closes.
Hedge-fund manager Citadel Investment Group LLC in Chicago and Frankfurt-based Deutsche Bank AG were among firms that piled into trades based on the spread between debt and swaps prices. Buying before the Lehman failure and the subsequent seizing up of the corporate bond market, many suffered losses and retreated.
Deutsche Bank Trades
Deutsche Bank was among those who held onto trades, forecasting the gap would close and the losses disappear, according to a person familiar with the lender?s trades.
The German bank made money by owning the debt and credit swaps of Lyondell Chemical Co., a Houston-based oil refiner and chemical producer that went bankrupt in January, the person said.
Lyondell sought and won a 60-day injunction in New York on Feb. 26 against creditors in an attempt to prevent basis traders from going after its Rotterdam-based parent, LyondellBasell Industries AF SCA, and other solvent units, documents filed in U.S. bankruptcy court in Manhattan show.
Bondholders with swaps filed objections to the ban, according to the documents. Jonathan Guy, a lawyer with San Francisco-based Orrick, Herrington & Sutcliffe who represents Deutsche Bank, said in court last month that his client owned Lyondell debt and credit derivatives.
Michele Allison, a spokeswoman in New York for Deutsche Bank, declined to comment, as did Lyondell spokesman David Harpole.
?Empty Creditors?
?You?re given these control rights under loan agreements or bond indentures on the general assumption that if you?re a creditor, you have an interest in the borrower surviving,? said Hu, who?s written about so-called empty creditors. ?Because of things like credit-default swaps, that assumption no longer holds.?
While basis traders may stymie efforts by companies to stay out of bankruptcy, they?re not Darth Vader-style destroyers, according to Brian Yelvington, a strategist at CreditSights Inc. in New York. The derivatives are bringing a measure of efficiency to the market that didn?t exist during earlier recessions, he said.
?You?ve got more information from a side of the market that didn?t exist before,? he said. ?People point at CDS causing all of this volatility. To me, it?s always been there. People haven?t been able to place the bets they would have liked.?
Creditor Resistance
Residential Capital LLC faced bondholder resistance to a debt-exchange proposal in December, in part because the investors also held derivatives, said Bradley Rogoff, a strategist at Barclays Capital, in a report that month.
With more than $2 billion in credit swaps and about $9.3 billion of bonds at the time, according to Moody?s, the Minneapolis-based company enlisted the support of only 39 percent of its creditors, falling far short of its goal of 75 percent.
During negotiations with creditors, ResCap?s Detroit-based parent, GMAC LLC, threatened creditors to initiate an asset exchange that may have left them with losses on the swaps, according to a written statement released at the time.
GMAC accepted a taxpayer bailout in late December. Beth Coggins, a spokeswoman for GMAC, declined to comment.
$47 Trillion
Credit swaps were created by JPMorgan Chase & Co. more than a decade ago to hedge against losses from bank loans. As dealers made the contracts more standardized, hedge funds, insurance companies and asset managers began using them to speculate on the creditworthiness of companies, sending trading in the swaps up to $47 trillion in 2008, according to the latest data from the New York-based International Swaps and Derivatives Association.
Richard Fuld, Lehman Brothers? chief executive officer, blamed his firm?s collapse on ?destabilizing factors? including credit-derivatives trading in Oct. 6 congressional testimony.
?People are having a hard time trusting anyone,? said Timothy Coleman, co-head of the restructuring group at Blackstone Group LP in New York. ?The motivations on the other side of the table are different.?
The combined average price on high-yield bonds and swaps dipped to as low as 85.06 percent of face value on Dec. 8, after Lehman?s failure Sept. 15, according to Barclays Capital. Two weeks before the bankruptcy, the cost was 92.13 percent, and rose to 94.12 percent as of yesterday. Investors who had done trades around the bottom would make as much as 15 percent with a default.
Distressed Debt
Idearc Inc., a Dallas-based publisher of phone directories, may come up against bondholders hedged with credit swaps, said people familiar with basis trading. The company may be forced into a distressed debt exchange or pre-packaged bankruptcy after hiring Merrill Lynch & Co. and Moelis & Co. to advise on its capital structure, Moody?s wrote in a Feb. 9 note.
Credit-default swaps protected a net $1.15 billion of Idearc debt from default as of Feb. 20, according to the Depository Trust. Idearc has $2.85 billion of bonds outstanding.
At the start of November, investors could buy the company?s 8 percent notes due in 2016 at 15.5 percent of face value. They could also purchase credit swaps protecting the bonds from default for seven years for 68 percent of face value, in addition to a 5 percent annual premium.
Gross Payout
The gross payout would be 16.5 percentage points if the company were to default. That gap has since narrowed to 5.75 percentage points, according to data from CMA DataVision and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
?We intend to look closely at all available opportunities to strengthen our balance sheet and improve our risk profile,? said Andrew Shane, an Idearc spokesman who declined to discuss specific options for the company.
In 2008, companies got investors to exchange $29.7 billion of bonds in a record 13 trades, according to Edward Altman, a professor at New York University?s Leonard N. Stern School of Business. Altman created the Z-score mathematical formula that measures a company?s bankruptcy risk.
Debt exchanged last year was more than three times the total amount from 1984 through 2007, said Altman. ?Firms appear to be scrambling to avoid bankruptcy like never before,? he wrote in his annual report on defaults, published last month.
?Defaults are one of several ways that basis holders can benefit, so it would not surprise me if names with high concentrations of basis holders encounter resistance in their efforts to restructure,? said Michael Anderson, a high-yield debt strategist at Barclays Capital in New York.
It makes me sick that healthy companies are subject to this crap as well. We need to get these CDSs on an EXCHANGE and have companies who buy them / sell them post MARGIN.
This is not capitalism, this is greed and mutual destruction for the sake of profit. Free market at work here.
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