Friday, April 17, 2009

Credit Default Swaps blamed for bankrupticies

From the FT:

Credit default swaps, the derivatives instruments that have figured prominently in the global financial crisis, are now being blamed for playing a role in two bankruptcy filings this week.

Bankers and lawyers involved in restructuring efforts say they are concerned some lenders to troubled companies, such as newsprint producer AbitibiBowater and mall owner General Growth Properties, stand to benefit from a default because they also hold default swaps, which entitle them to payments in such events.

“We have seen CDS becoming a significant factor” when negotiations on out-of-court restructurings fail, said Alan Kornberg, the partner in charge of the bankruptcy practice at Paul, Weiss, Rifkind, Wharton & Rice, speaking generally. “We used to talk about the practice theoretically but now we see cases where it is hard to get lenders to agree to tender or to compromise and then you find out that these holdouts had significant CDS protection.”

And yesterday, we saw that Carl Ichan is pushing MGM into bankruptcy.

Icahn and Oaktree purchased hundreds of millions of dollars of MGM Mirage bonds and have told the company it should overhaul its debts in bankruptcy, the Wall Street Journal reported, citing unidentified people familiar with the matter. The investors contacted the company last month to say bankruptcy is the best option, the newspaper reported.

And coincidentally, the notional amount of credit default swaps on MGM debt went up from $1.4 to $4.1 billion the last week!

Anyone care to guess what Carl owns?

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