Here are the basic facts: In the first half of 2013, Blackstone affiliate GSO Capital Partners purchased debt and credit default swaps in Codere SA, a listed Spanish company that operates betting parlors, online gambling sites and other gaming activities. GSO and another firm later purchased a €100 bank loan (via secondary markets) that Codere already had on the books, and then convinced Codere to delay repayment on the debt related to the aforementioned credit default swaps. That delay triggered the CDS, resulting in upwards of $18.7 million in profit for GSO.
Or, as Jon Stewart put it, they used the Goodfellas trick of taking out an insurance policy on a restaurant before burning it to the ground.
The reality, however, may be a bit more complicated.
Spanish law required that 75% of Codere bondholders agree to restructure the bank loans, which originally were designed to mature at the end of June. Unfortunately, a large percentage of those bondholders also held credit default swaps—just like Blackstone did—via a so-called basis plays that actually pay more for defaults than for debt repayment in full. What that meant was that the bondholders had little interest in letting Blackstone and its partner push back the maturities, thus leaving the firms with two options:
- Allow the debt to mature at the end of June, which likely would have pushed the troubled company into bankruptcy (yet still paid off the CDS, including to Blackstone).
- Convince Codere to default, so that bondholders would ratify the restructuring—thus keeping the company solvent at least through year-end.
In other words, Blackstone would have made money off the CDS no matter what. And, by providing a lifeline, the firm could charitably be viewed as the fireman rather than as the arsonist. In a statement, firm spokesman Peter Rose argued it thusly:
To be sure, Codere remains a company in deep trouble. Revenue is on the decline, and last year it experienced a $104 million loss after three straight years of profitability (this year is expected to be even worse). And Blackstone perhaps could have worked harder to get bondholders to the table, or figured out some way to roll its CDS profits directly into the company (or perhaps tied them to the extended debt, for which there is not yet a CDS market). Or used its connections to find another lender that didn’t also have CDS exposure.
But the move wasn’t quite as dastardly as The Daily Show made it out to be—something that perhaps the firm would have communicated to Stewart and Co. had it been asked for comment before airing (Rose says it was not).
Below is the segment. And, yes, it is funny—including shots taken at media outlets for not covering this in the first place (mea culpa—I actually hadn’t seen the Bloomberg piece until today).