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Hedge Funds Seek Fixes to Credit Default Swaps After Being Stung by Loopholes

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A group of powerful hedge funds is banding together to repair the credit-default swaps market after a spate of manufactured defaults has threatened the usefulness of the product.

Elliott Capital Management and Apollo Global Management are among firms working on closing loopholes that have allowed investors to profit from engineering defaults on a company’s debt, according to people with knowledge of the matter. CQS and Anchorage Capital are also part of the group, the people said. Companies’ failures to make payments on their borrowings can trigger CDS payouts.

Investors have previously complained that these maneuvers spur defaults from companies that are still very much alive, when credit derivatives were meant to protect money managers against the borrowers’ demise. Those complaints are translating to action now after a controversial trade late last year from Blackstone Group’s GSO Capital, where it loaned money to Hovnanian Enterprises Inc. and planned to induce a default on a portion of that company’s debt.

GSO Agrees

Source: on 2018-03-13 12:50:02

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