Thomas Cook collapse sets up $250 million hedge fund windfall

Not everyone lost out with the collapse of 178-year-old Thomas Cook Group that put 21 000 jobs at risk and left travelers around the world stranded.

Speculators including Sona Asset Management and XAIA Investment GmbH stand to earn as much as $250 million (R3.7 billion at current exchnage rates) from the bankruptcy.

They invested in derivatives that pay out when a company defaults. The fate of those securities was at the heart of the battle over whether Thomas Cook lived or died.

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

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

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

Thomas Cook’s rescue could have rendered CDS on the debt worthless and investors including Sona had threatened to block it. Holders of CDS were concerned about a technicality related to plans to convert Thomas Cook debt into shares, leaving 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 credit analyst at Spread Research in Lyon.

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