Hedge funds’ credit-default spat
In the world of credit default swaps, buyers and sellers usually prefer to keep quiet about their positions.
But the $10bn restructuring of the Luxembourg-based Ardagh Group has led to a rare public spat over the opaque derivatives, pitting London-based Arini Capital Management against rival funds.
The restructuring has also exposed Arini — which was one of Ardagh’s biggest bondholders — as having positions on multiple sides of Ardagh’s finances.
Arini was founded by former Credit Suisse star Hamza Lemssouguer in 2021. It’s grown rapidly and today manages more than $11bn in assets.
The fund has sold large amounts of Ardagh CDS, putting it at the centre of this week’s debate over how much buyers of the derivatives will be paid out.
The agreement to restructure Ardagh, one of the world’s biggest producers of glass and metal drinks containers, triggered the CDS contracts.
But it gets messy because the instruments don’t simply pay out a fixed amount. Instead, an auction of defaulted bonds is held, with CDS holders getting the difference between the amount the bonds fetch at auction and their face value.
Arini has argued that certain lower-ranking Ardagh bonds shouldn’t be included in that process. And it’s not hard to see why: Arini would face higher payouts on the CDS it sold if the lower-ranking bonds were included, according to several people familiar with the matter.
The fund said that including Ardagh’s unsecured bonds — which have since converted to equity — “would turn them into Schrödinger’s Obligations”, where they were both equity and debt at the same time.
London-based Tresidor Investment Management and New York-based Laurion Capital Management this week hit back, filing responses challenging Arini’s position.
Tresidor argued that it contains “multiple logical non-sequiturs”. Laurion’s lawyers from Milbank described Arini’s arguments as “incorrect and unworkably muddy”.
CDS is having a bit of a moment, especially to hedge against AI risks. So the resolution here could be critical to investors wondering what to expect in the way of payouts.
“This is about having a market that actually works,” said one credit investor with exposure to Ardagh’s CDS. “The product is there to insure people.”