ft article16 Sep 2019 18:22
ft article today
"Thomas Cook’s management team is facing a new challenge in its battle to save the 178-year-old travel group: credit default swaps.
The UK-based tour operator agreed the main terms of a £900m rescue deal with its biggest shareholders and lenders last month, after failing to adjust to a big shift by customers from the high street to the internet. But now the company is looking to push back a crucial meeting with its bondholders, originally set for tomorrow, partly out of fear that a group of hedge funds will block the deal.
The hedge funds are not resisting because they think the rescue plan is a bad one. Nor do they think the restructuring is too favourable to shareholders, rather than creditors. It is because they are worried the scheme might not trigger payouts on CDS. These are derivatives that behave like insurance contracts, protecting holders against the risk that a company does not repay its debts. Yet while a life insurance contract is simple to settle — a person is either alive or dead — the shades of grey in the death of a company make CDS much more unpredictable.
Thomas Cook is trying to reorganise its debt in a way that will trigger losses for bondholders. This is exactly the scenario where CDS should pay out. But they may not due to “reasons of almost theological complexity”, in the words of one bondholder.
The analogy evokes the high priests of the CDS market: an industry panel of in-house lawyers known as the “determinations committee”, drawn from nine banks and five fund managers, who decide whether swap holders get their windfalls. This committee’s reliance on highly complex legal arguments has led to a run of bizarre outcomes. The DC, as the committee is known in the trade, is widely seen as technocratic at best, or conflicted at worst.
In the Thomas Cook case, some bondholders worry that even if the company files for protection from creditors in the US courts, it may still not trigger the swaps.
When Spain’s Abengoa filed for protection from its creditors four years ago, for example, it led to a surreal scenario where CDS written under one set of contracts were triggered, but those under a newer set did not. This was because of a one-word difference in a single clause.
Earlier this year, the DC disregarded a strict interpretation of English law and voted in favour of fixing a technical glitch in telecoms company VodafoneZiggo’s CDS. Cynics noted the banks, whose representatives hold most of the seats on the committee, stood to lose from the decision going the other way. Perverse outcomes in the CDS market often provoke amusement among observers, because the victims are typically highly paid traders.
The joke seems less funny when the consequences spill over into the real world and, as with Thomas Cook, hold hostage the rescue of a group with more than 20,000 employees."
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