This week, mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater both filed for bankruptcy, after failing to persuade bondholders to restructure voluntarily.
Now lawyers involved in these bankruptcy proceedings tell the Financial Times that the credit default swaps are the problem — mainly, bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball, since the CDS, if the counterparty honours the agreement, makes them whole.
FT: Some creditors, including Citigroup, which held a small exposure to AbitibiBowater, hedged themselves in the CDS market, meaning their economic interest in the deal was different to lenders who had not bought credit insurance, according to people familiar with the matter. Citigroup declined to comment.
Lawyers say CDS holdings were also a factor in the default and filing for Chapter 11 protection of General Growth Properties this week. Restructuring advisers expect many more such cases involving so-called fallen angels, or firms originally investment grade, since CDS was widely sold on such names.
Now just take a wild guess. What firm is most likely to be on the other end of Citi’s CDS purchase? AIG maybe?
If it is AIG, it means our bailout is pushing companies into bankruptcy that might otherwise be able to restructure.
Note that this has been alleged before, though previously with GM’s ongoing failure to get its bondholders to exchange debt for equity. Now those involved in actual bankruptcies are citing it as a problem.