Add another $1.5 billion headache to the problems of financial services companies. That's the net outstanding value of credit default swaps on the debt of Tribune Co., which
filed for bankruptcy Monday afternoon. According to data from the Depository Trust and Clearing Corp., there is roughly $20.5 billion worth of credit default swaps on Tribune's debt outstanding, although the figure drops to around $1.5 billion after including trades that cancel each other out.
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The cost of swaps protecting against a Tribune default have been surging as the company's woes mounted. With a filing approaching fast, issuers were charging an up-front
payment of 91 percentage points for those wanting to purchase swaps
earlier Monday, according to CMA data. Also doing brisk business were issuers of
credit recovery swaps, which a buyer can purchase to lock in a minimum
amount that they will recover in the event of a default.
Credit recovery swaps allow buyers to guarantee they will receive a
certain percentage of the value of the debt from a defaulting company,
i.e. if a swap holder has a recovery contract for 25%, but the
company's only compensates debtholders with 10 cents on the dollar,
the issuer has to pay out the remaining 15 cents on the dollar.
According to Bloomberg, recovery locks for Tribune were trading at
about 7 cents on the dollar Monday morning, down from about 14 cents in
September. Tribune's bonds were trading between 3 cents and 6 cents on the
dollar on Monday, meaning issuers of both types of protection are
likely to shell out plenty on the contracts.
Tribune had $11 billion in
outstanding long-term debt as of Sept 28, according to a regulatory
filing. -
George White
See Dealscape post on Tribune filing
See Bloomberg story on swaps
