It is no question that an unseen wave of corporate defaults is
ahead of us. However, this time the default cycle may turn out to be
even somewhat more vicious because investors including activists have
loaded up the boat with basis trades (long debt versus long credit default
protection as a hedge. When the crisis was in full swing those investors
left standing had the chance to acquire such positions at very attractive
spreads because prices of cash debt instruments (bonds and loans) have fallen
more than the derivative instruments related to them (CDS). Funds positioned
in such trades can make attractive arbitrage returns on those trades because
they lock in a positive carry with very little risk involved. However, think
about large hedge funds who have build cash debt positions which enable them
to block outcomes of restructuring efforts when a company comes under stress or
holders of basis trades who team up. They have an incentive to put companies
in bankruptcy when it comes to such restructuring efforts because they make
gains on their CDS position and it would be naive to believe that they always
are just hedged. Whenever there is a chance to hold a blocking in maybe a small
class of securities for a relatively low dollar in a company with a high chance
of running against their debt wall they may load up the boat three or more times
with CDS in order to get a very attractive return when they put the company in
bankruptcy. In my view such a strategy should not be legal but I doubt that
it is and there may be plenty of work around solutions as long as the otc
derivatives market (about 10 times world GDP in size) remains unregulated.
CDS often gets confused with insurance. It actually is long or short credit
but not insurance. The only difference to long or short cash credit is that
financials do not report them and have no equity to support it's risk ;-)
In insurance land, as far as I know, you need do have an insurable interest
and it is unlawful to insure your hated neighbors house.
house.
1 Kommentare:
Perhaps we will see a new variant of "poison pill" come to pass in corporate bylaws. Except this time around instead of protecting a company from a takeover, it might protect against parties who have a vested interest in failure. Probably something along the line of restricted voting rights for those determined to hold insurance, hedging, or other inverse instruments in excess of their equity exposure to the company itself.
A clever law firm which sets the groundwork and makes a name for itself could probably clean up on this kind of work.
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