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Thomas Cook collapse sets up $250M hedge fund windfall

A panel of traders known as the Determinations Committee will meet to debate whether Thomas Cook’s Chapter 15 U.S. bankruptcy filing was sufficient for payment.
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Not everyone lost out with the collapse of 178-year-old Thomas Cook that put 21,000 jobs at risk and left travelers around the world stranded.

Speculators including Sona Asset Management and XAIA Investment stand to earn as much as $250 million from the bankruptcy.

They invested in derivatives that pay out when a company defaults. The fate of those securities was at the heart of the battle over whether Thomas Cook lived or died.

Thomas Cook will be the latest of several big payouts this year for hedge funds and traders who bought these so-called credit default swaps. The list includes U.K. fashion retailer New Look and Rallye, parent of French supermarket chain Casino Guichard-Perrachon. More are set to follow as Europe’s economy slows and a growing number of companies come under stress.

The decision to trigger payouts on Thomas Cook CDS lies with a panel of traders called the Determinations Committee. The group is meeting on Monday to debate whether last week’s Chapter 15 U.S. bankruptcy filing was sufficient for payment. Now, it’s also being asked to assess Thomas Cook’s liquidation.

CDS are a popular way for hedge funds to bet on companies facing difficulties with their balance sheets. They don’t always pay out in the event of default, however.

Thomas Cook’s rescue could have rendered CDS on the debt worthless and investors including Sona had threatened to block it. Holders of CDS were concerned about a technicality related to plans to convert Thomas Cook debt into shares, leaving the CDS with nothing to insure.

At 84 basis points, the average expense ratio is over 40 basis points pricier than what investors paid on average last year.
September 18

“It’s certainly a relief for the hedge funds that Thomas Cook has filed and they haven’t had to push the company into administration,” said Marc Pierron, a senior credit analyst at Spread Research in Lyon.

If rescue talks hadn’t collapsed over the weekend and the hedge funds had undermined them to ensure a payout, it would have added to criticism of the CDS market.

Regulators are already eyeing the derivatives market for so-called manufactured credit events, when funds entice companies to miss bond payments they could otherwise make.

Bloomberg News