GSO Set to Score Victory in Battle Over Paper Maker’s Swaps

Updated on
  • ISDA to delay CDS settlement auctions until after bond matures
  • GSO won’t have to pay out on short-term credit-default swaps

Blackstone Group LP’s GSO Capital Partners is set to score a victory in a drawn-out battle over derivatives linked to a distressed Norwegian paper maker.

Bond auctions to determine the cost of settling as much as $9 billion of credit-default swaps on Norske Skogindustrier ASA will be delayed until after some of the company’s notes mature next month, according to the International Swaps & Derivatives Association. If Norske Skog repays the obligations, GSO won’t have to compensate buyers of short-dated insurance because there won’t be any eligible securities for an auction.

Swaps contracts are being settled after Norske Skog adopted GSO’s plan to force all holders of its bonds due June 2017 to exchange their notes for longer-dated securities with lower principal and interest payments. GSO had been competing since September with another group of bondholders over restructuring plans that would determine the timing of payouts on credit-default swaps.

“GSO knows very well how to make money with credit-default swaps and bonds in distressed companies,” said Jayanth Kandalam, a senior credit analyst at Lucror Analytics in Singapore. “In this case, they went for a restructuring plan that effectively reduced payouts to short-term CDS buyers. Investors who went short without buying bonds of similar tenor to hedge their positions will lose a lot of money.”

Debt Restructuring

GSO had sold swap contracts maturing by the end of 2017 and sought to extend Norske Skog’s bonds long enough to avoid triggering payouts, people with knowledge of the matter said in December.

Andrew Dowler, a spokesman for Blackstone in London, declined to comment on the implications of the debt restructuring for credit-default swaps or its positions.

Norske Skog’s bonds are due on June 15 and ISDA said it plans to delay the auction to about June 22, according to a statement on its website. The 121 million euros of notes are quoted at 98 cents on the euro, up from 60 cents at the end of 2015, according to data compiled by Bloomberg.

Swaps Payouts

“If the 2016s are redeemed in full, the auction will be deemed to generate an auction final price of 100 percent,” ISDA said on Friday. “If not, the auction will proceed as normal.”

Under a so-called restructuring credit event, buyers and sellers can choose whether to settle contracts in a series of auctions based on expiration dates. The 2016 notes are the only securities that can be delivered into the 2.5-year bucket, while other bonds can be used for five-year, 7.5-year and seller auctions, according to ISDA’s statement.

Norske Skog adopted GSO’s restructuring proposal after Blackstone’s credit arm became the company’s largest shareholder and provided extra capital to keep it afloat. GSO and Cyrus Capital Partners, which partnered on the restructuring plan, together held about 68 percent of the 2017 notes, according a company statement on March 18. The exchange probably prevented a conventional default, Standard & Poor wrote in a report on April 13.

Bondholder Groups

BlueCrest Capital Management, Marathon Asset Management and Sampo Oyj had pushed for a different plan that may have triggered payouts on default swaps, according to people familiar with the matter. BlueCrest denied it stood to profit from a default after the company said some bondholders were trying to drive it into bankruptcy.

More than 7,000 swaps contracts insuring a gross $9 billion of Norske Skog’s debt were outstanding as of May 13, according to the Depository Trust & Clearing Corp. Swaps covered a net $291 million of debt after accounting for overlapping trades.

Norske Skog, Europe’s third-largest maker of newsprint, reorganized about $1 billion of debt after its revenue plummeted along with readership of newspapers and magazines.

(Updates with analyst comment in fourth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE