On November 21, 2018, investors who bought insurance tied to Sears Holdings Corp’s bankruptcy said hedge fund Cyrus Capital Partners LP tried to tilt a key market ruling in its favor, according to a letter seen by Reuters.
The investors alleged that Cyrus worked to “torpedo” a planned Tuesday auction for company bonds by pushing Sears to accept language in a bankruptcy court order that would have disqualified the bonds from credit proceedings. The claim centered on whether the bonds should be included in the market process that determines payouts on credit insurance.
Cyrus had sold the insurance on the view that Sears would avoid bankruptcy. The investors, whose names were redacted in the letter, made the opposite bet and were proved right when Sears filed for bankruptcy protection in October 2018. It was not clear whether they bought the insurance from Cyrus or another firm.
The letter was submitted on Tuesday by lawyers for the investors to a committee of the International Swaps and Derivatives Association, which oversees the market. Later that same day, ISDA said the bonds would be included, according to a posting on its website.
Sears and Cyrus both declined to comment. The result of the bond auction was not immediately known.
The sale of the notes was meant to help fund an account for Sears that could cover expenses and potentially support the company’s efforts to stay in business. Cyrus, which has more than $4 billion in assets under management, could face payouts worth millions if the insurance is triggered, people familiar with the matter said.
Investors have long argued that the credit derivatives market can be vulnerable to manipulation, pointing to cases such as Hovnanian Enterprises Inc, which defaulted on purpose earlier in 2018 as part of a planned refinancing. They say such tactics can hurt other market participants.
Among the biggest buyers of the Sears credit insurance were Leon Cooperman’s Omega Advisors Inc and Och-Ziff Capital Management Group LLC, suggesting those hedge funds expected Sears to file for bankruptcy, one of the people said. Och-Ziff and ISDA did not immediately respond to requests for comment.
According to the investors’ letter, Cyrus also negotiated with Sears to have the 125-year-old retailer include language in the court order saying the bonds may have claims related to its bankruptcy. The investors said that wording could reduce the bonds’ value in the auction and may help Cyrus limit losses on its wrong-way bet on Sears.
Reporting by Jessica DiNapoli; Editing by Lisa Shumaker.
