Hedge funds set to make £200m from failure of Thomas Cook

Funds on track to profit from financial products that pay out when a company defaults on its debts

(EPA)

It is hard to see any silver lining in the collapse of Thomas Cook, which has left 21,000 people facing almost certain redundancy and the government on the hook for repatriating the firm’s British customers.

But for some financial speculators the bankruptcy is good news. It is set to earn hedge funds, including Sona Asset Management and XAIA Investment, as much as $250m (£201m).

They invested in financial products that pay out when a company defaults on its debts. The fate of those so-called credit default swaps (CDS) was at the heart of the battle over whether Thomas Cook lived or died.

The decision to trigger payouts on Thomas Cook CDS lies with a panel of traders called the Determinations Committee. The group was due to meet on Monday to debate whether the Chapter 15 US bankruptcy filing by Thomas Cook last week is sufficient for payment. Now, it has also been asked to assess Thomas Cook’s liquidation.

CDS are a popular way for hedge funds to bet on companies facing financial difficulties. They don’t always pay out in the event of default, however.

If Thomas Cook had been rescued, thanks to a deal long in the works, CDS on the company’s debt may have become worthless and investors including Sona had threatened to block the rescue plan. Holders of CDS were concerned about a technicality related to plans to convert Thomas Cook debt into shares, which would have left 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 analyst at Spread Research.

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.

Regulators are already keeping an eye out for so-called manufactured credit events, when funds entice companies to miss bond payments they could otherwise make.

Thomas Cook will be the latest of several big payouts this year for hedge funds and traders who bought CDS. The list includes retailer New Look and Rallye, parent of French supermarket chain Casino Guichard-Perrachon. More are set to follow as Europe’s economy slows and a growing number of companies come under stress.

Bloomberg