Wall Street Firm Structured Totally Legal, Ingenious Trade That Was Guaranteed To Pay Out

Stephen Schwarzman BlackstoneREUTERS/Tyrone SiuStephen A. Schwarzman, Chairman, CEO and Co-Founder of the Blackstone Group.

A unit of Blackstone Group, the world’s largest private equity firm, essentially paid a company to purposely miss a debt payment in order to profit on credit default swaps (CDS),
Bloomberg’s Mary Childs reports.

In a brilliantly crafty deal, Blackstone was guaranteed to make money.

CDSs, a kind of insurance against defaults and missed debt payments, were one of the main culprits in the global financial meltdown. Regulators have tried to make them more transparent, with limited success.

Here’s how the deal went down, according to Childs:

Earlier this year, the Blackstone unit, GSO, bought bonds of and CDSs against a company called Codere, which operates betting parlors and race tracks in Europe and Latin America.

Then the Blackstone unit (along with another firm) took over a separate 100 million euro revolving Codere credit facility from several different megabanks.

Among the conditions of that deal: if Codere paid an interest payment due Aug. 15 (with a 30-day grace period), it would have to repay the entire loan at once.

But that was never going to happen, because the Blackstone unit (along with another firm) then lent Codere $US35 million to cover the cost of missing the payment.

As agreed, Codere paid the loan two days late, and the CDSs were triggered.

Childs estimates the Blackstone unit netted at least $US15.6 million off the deal.

It’s totally legal, since both sides agreed to the terms. Codere ends up benefiting too, since more banks will now be interested in lending to it.

Click here to read Child’s full report at Bloomberg »

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