An illiquid corner of swaps insuring Credit Suisse Group AG debt surged back to life this week as some hedge funds make the case they should be triggered.
(Bloomberg) — An illiquid corner of swaps insuring Credit Suisse Group AG debt surged back to life this week as some hedge funds make the case they should be triggered.
Funds including FourSixThree Capital and Diameter Capital Partners have been buying swaps insuring Credit Suisse’s subordinated bonds with the idea that the controversial writedown of the firm’s AT1 securities could prompt a potential payout of the derivative contracts, according to people familiar with the matter.
While the five-year credit default swaps dipped on Thursday, they’re up more than 80 basis points this week to about 360, according to CMAI prices.
That’s the biggest increase since UBS Group AG agreed to buy Credit Suisse in an emergency weekend deal in March. As part of that acquisition, Swiss regulators forced the wipeout of about $17 billion of so-called Additional Tier 1 notes.
Law firm Kramer Levin is helping with efforts to make a case for a triggering event, said the people, asking not to be identified describing private talks.
Earlier this week, at least one question was sent to the Credit Derivatives Determinations Committee — a panel of 13 banks and asset managers that regulate the credit derivative swap market — in an attempt to trigger an insurance payout, according to separate people familiar with the matter.
But the CDDC’s website showed no such submissions as of 9:20 a.m. in London.
The CDDC didn’t immediately respond to an emailed request for comment. Representatives for FourSixThree, Diameter, and JPMorgan declined to comment.
A spokesperson for Kramer Levin didn’t respond to requests for comment.
Traders at JPMorgan Chase & Co. have held discussions with buyside clients over the possibility of a trigger, fueling some trading in the swaps this week, separate people briefed on the matter said.
The JPMorgan traders were presenting the argument as one that some hedge funds are making rather than the bank’s view, the people said.
Many investors in the AT1 bonds have separately brought legal challenges against the writedown decision, which regulators have argued was justified because the rescue deal involved state support.
–With assistance from Alastair Marsh and Giulia Morpurgo.
(Updates with details about a submission made to the Credit Derivatives Determinations Committee in the fourth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.
