Codere Default Riddle Skewing Cost of Hedging Europe’s Junk Debt

Codere SA’s struggle to sidestep default is skewing a benchmark derivatives index, with a surge in credit-default swaps on the Spanish gaming company pushing up the cost of insuring high-yield debt.

Swaps on Madrid-based Codere imply a more than 90 percent chance of default within five years, up from 70 percent last month. The contracts account for 2 percent of the Markit iTraxx Crossover Index of junk-rated companies and are adding 9 percent to the cost of the benchmark, according to Citigroup Inc.

The prospect of a default by Codere adds to investor concern about a flight from high-yield assets as central banks consider curbing stimulus measures. The casino operator faces about 60 million euros ($80 million) of loan and coupon payments on June 15, according to Moody’s Investors Service.

“Crossover has always been the bellwether for credit,” said Michael Hampden-Turner, a strategist at Citigroup. “At a time when people are thinking we’re about to have a major selloff, the index is being pushed additionally wide because of the selloff in this one name.”

Codere and Norwegian newsprint maker Norske Skogindustrier ASA are outliers in Markit Group Ltd.’s Crossover gauge, with each trading at the equivalent of about 2,500 basis points and adding 40 basis points to the cost of the index as of yesterday, according to Bloomberg and Citigroup data.

‘Advanced Negotiations’

The remaining 48 companies trade below 725 basis points, with more than half below 400 and swaps on Infineon Technologies AG, the lowest in the index, at 169.5. The index itself cost 455 basis points at 12:02 p.m. in London.

Swaps on Codere fell from a record today after the company said in a statement that it’s “in advanced negotiations with various institutions” to renegotiate its senior credit facilities. It now costs 3.9 million euros upfront and 500,000 euros annually to insure 10 million euros of Codere’s debt for five years, down from 4.1 million euros in advance yesterday, according to data provider CMA.

The contracts signal a 91 percent probability of default, down from 93 percent yesterday, assuming investors recover 50 percent of their holdings. They cost 2.8 million euros in advance on May 7, according to CMA, which compiles prices quoted by dealers in the private market.

There were a total of 2,651 credit-default swaps trades covering $407 million of Codere’s debt outstanding as of June 7, according to the Depository Trust & Clearing Corp., which runs a central registry for the market. Codere is also included in 13 series of Markit’s Crossover Index.

Rating Downgrade

Moody’s last month cut Codere’s credit rating to Caa3, nine steps below investment grade, saying the 60 million euro facility that matures on June 15 “is vital in enabling the company to continue meeting its obligations.”

Moody’s also said that “even if Codere manages to withstand liquidity stress” this month, it will struggle to refinance 760 million euros of bonds due June 2015 and the company will probably have to restructure debt because its liquidity is “inadequate” and its capital structure is “unsustainable.”

Codere, which is based in Spain and depends on Argentina for more than a third of its revenue, is facing “multi-directional headwinds,” according to Chris Snow, an analyst CreditSights Inc. in New York. Those include changing smoking laws in Argentina and gambling laws in Mexico.

“Right now the capital structure is untenable,” Snow said. “My expectation is they kick the can, but restructuring is a very high probability, or a default.”

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