As if Google weren't menace enough, newspaper companies are finding themselves undermined by another modern innovation: the credit default swap.
In the
cover story for the The Deal magazine published Monday, Richard Morgan tells about the dire situation Gannett Co. (NYSE:GCI) finds itself in after nearly three-quarters of bondholders, hedged with credit default swaps, declined an exchange offer that expired May 5. Thanks to the CDSs, they stand to get a better payoff if Gannett defaults.
Morgan followed that story up with a
report on McClatchy Co. (NYSE:MNI) in The Deal Pipeline on Monday (subscription required). It too tried to do an exchange offer on some troubled bonds, but reported last week that only a small minority of holders went for the offer, valued at around 33 cents on the dollar. Thanks to their CDS hedges, the bondholders can expect 100 cents if McClatchy defaults.
It's an incentive some call perverse, and also one that couldn't have existed before the CDS market sprang up. As Morgan writes, CDSs began the decade as a $900 billion market but ended last
year with a notional value of $42 trillion. That's a lot bigger than the $25 trillion market for outstanding corporate
bonds, municipal bonds and structured investment vehicles that CDSs
were designed to reference.
Morgan points out that the business-model woes of the newspaper industry make it especially vulnerable to the problem. But not uniquely so, by any means. -
Kenneth Klee
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