Thomas Cook collapse sets up US$250m hedge fund windfall

Thomas Cook banner is seen at Mallorca Airport after the world's oldest travel firm collapsed stranding hundreds of thousands of holidaymakers around the globe and sparking the largest peacetime repatriation effort in British history, in Palma de Mallorca, Spain, September 23, 2019. REUTERS/Enrique Calvo

LONDON: Thomas Cook Group Plc’s collapse may prove lucrative for some.

Investors holding credit insurance on the U.K. travel agent’s debt are set for a long-awaited payday and may cash in on as much as $250 million after the company filed for liquidation early Monday.

Thomas Cook will be the latest of several big payouts this year for hedge funds and traders who bought credit-default swaps, derivatives that pay out when a borrower runs into trouble. The list includes U.K. fashion retailer New Look and Rallye SA, parent of French supermarket chain Casino Guichard-Perrachon SA. 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 was set to meet on Monday to debate whether last week’s Chapter 15 U.S. bankruptcy filing was sufficient for payment. Now, it is also likely to be 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 Asset Management 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.

"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.

Read more: Thomas Cook’s Rescue Tests Reputation of Default Protection

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