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Anchorage Caught Short in Chatham's McClatchy Trade

  • Hedge fund among firms that had been buying CDS on publisher
  • Trade threatnened by deal McClatchy and Chatham have struck

Anchorage Capital Group is among the firms caught on the opposite side of a credit-default swaps trade that has sparked the latest round of consternation in the CDS market.

The $17 billion hedge fund had been betting against McClatchy Co. by buying credit derivatives that would profit if the newspaper company’s fortunes sour, according to people with knowledge of the matter. But the trade could now backfire, after Chatham Asset Management struck up a deal with the publisher that threatens to make those swaps all but worthless.

The trading in McClatchy is the latest to roil the $11 trillion market for credit insurance, where investors have been frustrated by the use of the swaps that run contrary to their intended purpose while catching the attention of regulators. The market has been under scrutiny in recent months for a separate deal involving Hovnanian Enterprises Inc. and Blackstone Group LP.

“We didn’t enter this deal to hurt the CDS market,” Elaine Lintecum, the chief financial officer of McClatchy, said in an interview. “I don’t have a fiduciary duty to the CDS market. Those betting against the company in the CDS market have a motivation to hurt McClatchy and its shareholders.”

Spokesmen for Anchorage and Chatham declined to comment.

Chatham has offered a $418.5 million loan deal for McClatchy, with the company using the proceeds to pay down most of its unsecured bonds that happen to be held by the hedge fund. But the deal is structured in a way that could hamper CDS buyers because of a quirk.

McClatchy would be issuing the debt from a subsidiary, while extinguishing most of the borrowings in the current structure. The Chatham deal is fueling speculation it will create what’s commonly known in the CDS world as an orphaned contract. In other words, anyone who bought insurance on a McClatchy default would effectively be paying insurance on an entity with no significant debt.

McClatchy is currently focused on closing its deal with Chatham, Lintecum said.

“No one has approached me with another deal,” Lintecum said. “Any other offers of a deal that would come to McClatchy, we would evaluate those and do what’s in the best interest of our shareholders.”

Chatham has also been selling credit-default swaps protection, and stands to benefit from any drop in the swaps. After McClatchy announced the refinancing deal, it wiped out 70 percent of the market value of a five-year CDS on McClatchy, data compiled by Bloomberg and price provider CMA show.

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