Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance

GSO Capital Partners LP provided a loan to Spanish gaming operator Codere SA in June with terms that gave it a guaranteed return on credit-default swaps, outmaneuvering sellers of the protection.

The unit of Blackstone Group LP structured the loan in a way that would lead to a payout on swaps it held, according to three people with knowledge of the situation who asked not to be identified because the discussions were private. The contracts were triggered on Sept. 18 after Codere delayed an interest payment by two days to comply with the loan terms. GSO held 25 million to 30 million euros of the swaps, meaning it may have made at least 11.4 million euros ($15.6 million), according to one of the people and data compiled by Bloomberg.

The trade shines a light on the opaque world of credit-default swaps, where the interests of lenders and debt traders aren’t always aligned and those in a position of influence have the ability to affect whether the contracts get triggered.

“If you’re going to trade CDS, you’ve got to be fully aware,” Peter Tchir, founder of New York-based hedge-fund adviser TF Market Advisors, said in a telephone interview. “The only losers are the guys who seemed to play the CDS market incorrectly or didn’t see this as a potential outcome.”

Betting Parlors

Andrew Dowler, a spokesman for New York-based Blackstone, declined to comment for GSO. Italo Durazzo, a Madrid-based spokesman for Codere, declined to comment on GSO’s trade and the restructuring talks.

Codere, which operates betting parlors and race tracks from Italy to Argentina, is attempting to restructure about 1 billion euros of debt after posting losses for six straight quarters, reflecting in part smoking bans in Latin American gaming halls.

The company 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 about 18 percent are owned by the Martinez Sampedro family, board members and management.

Bonds, Swaps

GSO, the New York-based credit investing unit of Blackstone, the world’s largest private-equity firm, bought Codere’s bonds and credit-default swaps in the first half of this year, hoping to profit from differences in pricing of the instruments in what’s known as a basis trade, according to a person familiar with the transactions.

The swaps GSO held were weighted toward those expiring within the year, the person said.

GSO and Canyon Partners LLC then took over what the company said at the time was a 100 million euro revolving loan from banks including Barclays Plc and Credit Suisse Group AG, extending the maturity for six months, Chief Financial Officer Angel Corzo Uceda said during an Aug. 30 conference call to discuss first-half earnings with analysts and investors.

A condition was attached to the debt stipulating that it would be repaid should Codere make an Aug. 15 interest payment on its $300 million of 9.25 percent bonds due in February 2019, according to a June 13 statement on the company’s website. GSO and Canyon lent the company an additional 35 million euros in September.

Late Payment

The company’s willingness to pay the coupon late helped ease restructuring negotiations as many bondholders also held credit-default swaps and would benefit from a missed payment, the person said. Codere made the August payment two days after a 30-day grace period, and the International Swaps & Derivatives Association ruled that there was a failure-to-pay credit event, resulting in a $197 million payment to holders of the swaps.

Based on a value of 54.5 cents on the dollar for the bonds set at an Oct. 9 auction administered by Markit Group Ltd. and Creditex Group Inc. to determine the swaps payout, GSO would have made from 11.4 million euros to as much as 13.7 million.

With the issue of triggering the swaps resolved, the company and lenders could focus on restructuring the debt.

Default swaps were blamed by the Financial Crisis Inquiry Commission for contributing to the worst credit meltdown since the Great Depression, and regulators have sought to push the contracts from privately negotiated transactions off exchanges to more transparent systems.

“As a lender, the idea is to help somebody make payments on their debt,” said Bonnie Baha, the head of global developed credit at Los Angeles-based DoubleLine Capital LP, which manages about $53 billion. “It’s generally not to pay them not to make payments on their debt so that you can benefit via a derivative instrument.”

Restructuring Talks

Codere’s 9.25 percent bonds traded Aug. 14 at 55 cents on the dollar to yield 24.6 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, while its 660 million euros of 8.25 percent bonds due in June 2015 were quoted at 52.92 cents to yield 55.49 percent at 10:58 a.m. in New York, according to prices compiled by Bloomberg.

A creditor steering committee, which includes Greenwich, Connecticut-based hedge fund Silver Point Capital LP is now in talks with the company over its debt restructuring, two people familiar with the matter said. Other creditors include London-based M&G Investment Management Ltd. and Cyrus Capital Partners LP, two people said.

Tripp Kyle, a spokesman at Brunswick Group LLC for Canyon; Adam Weiner, a spokesman for Silver Point at Kekst & Co.; executives at M&G, who asked not to be identified citing company policy; and Ember Shmitt, a spokeswoman for Cyrus, declined to comment.

‘Totally Irrational’

Codere’s earnings before interest, tax, depreciation and amortization fell 34 percent in the second quarter, and the company’s September performance was in line with that, according to an Oct. 15 report from CreditSights Inc.

The company restated its 2012 earnings on June 3 after detecting accounting errors, bringing last year’s net loss to 134 million euros.

The company’s shares, which dropped as low as 1.15 euros in September, closed at 1.59 euros in Madrid yesterday.

Moody’s Investors Service rates Codere’s debt Caa3, nine levels below investment-grade, and Standard & Poor’s puts it one rung lower at CC. Both ratings have “negative” outlooks.

“This is totally irrational from the perspective of an investor who loans money to a company, buys the bonds or loans, and expects to get paid back,” said DoubleLine’s Baha. “They’re definitely stacking the deck.”