Codere Seen Triggering Swaps on Coupon Miss: Corporate Finance

Codere SA’s decision to delay payment of a bond coupon until two days after the money is due may trigger payouts on credit-default swaps insuring $444 million of the Spanish gaming company’s debt.

“I personally think they’ll trigger the CDS,” said Stan Manoukian, founder of Independent Credit Research, which supplies analysis to distressed debt investors. “It was their intention to let people make money on the CDS and keep the company afloat.”

Codere said today that it paid a penalty to change the terms of a 99 million-euro ($132 million) loan from private-equity firms Canyon Partners LLC and Blackstone Group LP’s GSO Capital Partners requiring the facility to be repaid should the coupon be paid. It will now miss a payment on its $300 million of 9.25 percent bonds due Sept. 15 and pay the money two days later, according to the statement.

That delay will enable buyers of credit-default swap protection to seek a ruling from the International Swaps & Derivatives Association that there’s been a failure-to-pay credit event and that the contracts should be settled. That may simplify a restructuring of Codere because the company could then work with the remaining creditors to repair the business, according to Manoukian.

‘Cash Out’

“Non payment of the coupon would trigger the CDS and allow some funds involved in the restructuring to cash out,” said Manoukian.

Some of Codere’s senior lenders agreed to increase the loan from Canyon and GSO Capital by 35 million euros, according to the statement. The facility matures on Jan. 5 and can be drawn down as many as three times between Sept. 17 and Dec. 5. The commitment fee is 3.25 percent per year on the undrawn borrowing and the company has to pay the greater of 7 percent over benchmark rates or 8 percent a year for any money taken, according to the statement.

Investor confidence in the company deteriorated as it negotiated with lenders, with its 8.25 percent notes due June 2015 falling to 51 cents on the euro from 80 cents in May, according to Bloomberg data. The 9.25 percent bonds on which the interest payment is coming due were quoted at 51 cents compared with 73 cents in May.

Terms Amended

The majority of holders of Codere’s 8.25 percent bonds agreed to amend the terms to allow the loan to be increased, according to the company. Investors in both Codere’s dollar- and euro-denominated notes agree they won’t force repayment when the coupon is paid late.

A total of 3,192 swaps contracts insuring Codere’s debt were outstanding as of Sept. 6, according to the Depository Trust & Clearing Corp. There were 24 trades covering $60 million of the company’s obligations last week.

Five-year contracts signaled a 97 percent chance of the company defaulting during that period and cost 5.2 million euros in advance and 500,000 euros annually to insure 10 million euros of Codere’s debt.

“It’s conceivable that many investors in Codere would like to see the CDS triggered.” Giovanbattista Caracciolo, a bond trader specializing in distressed debt at AdviCorp Plc, an independent investment bank based in London and Rome, said before the company’s statement.

Bonds Outstanding

Codere has about 1 billion euros of bonds outstanding and had 109 million euros of cash at the end of June, according to an Aug. 30 earnings statement. Bondholders seeking to take control of the company for 95 percent of its shares, would forgive 350 million euros of its debt, a person familiar told Bloomberg News last month.

The company posted losses for six straight quarters, hurt by a smoking ban in Argentina and strict gambling laws in Mexico. An event of default won’t damage the company’s betting licences, Chief Financial Officer Angel Corzo Uceda said in an earnings call with investors on Aug. 30.

Codere is 51 percent-owned by Masampe Holding BV, a company controlled by members of the founding Martinez Sampedro family, according to a statement on its website citing December 2012 data. The remainder of the shares are listed on the Madrid stock exchange and owned by the Martinez Sampedro family, board members and management. The stock closed at 1.18 euros in Madrid, down from 4.2 euros in February.

Default Rating

Codere’s bonds are the highest-yielding among western European companies that haven’t restructured or filed for bankruptcy and the company’s debt is the second-most expensive to insure in the world after Energy Future Holdings Corp., Bloomberg data show.

Codere’s probability of default rating was downgraded to Ca by Moody’s, defined as “in or very near default”, when the company deferred paying a June 15 coupon on its 8.25 percent notes maturing in June 2015. The New York-based ratings company affirmed the company’s credit grade at Caa3, nine levels below investment grade.

“It looks like the company is headed for a default event, and then credit-default swaps will probably be triggered,” said Ivan Palacios, an analyst at Moody’s in Madrid, said before the company released its statement.

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