Blackstone's Brilliant Trade

Blackstone’s Brilliant Trade

For all their faults, the guys on Wall Street are pretty smart. Blackstone Group is the world’s largest private equity firm and they recently paid a company to purposely miss a debt payment that would allow the firm to cash in on credit default swaps. Credit default swaps act as insurance against someone defaulting on a debt payment. Essentially, if someone misses a debt payment, the owner of the CDS gets paid.

Blackstone bought bonds and CDSs of gambling company Codere, which operates in Europe and Latin America. By purchasing a bond, Blackstone was buying some of Codere’s debt. By buying the Credit Default Swaps (CDS) they purchased insurance so that if Codere did not pay its debt, an insurance company would have to pay Blackstone.

Blackstone determined they would profit more if the CDSs were activated by a missed payment than if Codere paid the interest on the bonds. Blackstone then made a perfectly legal deal with Codere where Codere agreed to make the payment two days late and trigger the CDS and Blackstone lent Codere $35M to cover the cost of a late payment.

Blackstone netted over $15.5M in this savvy deal, which was legal since both sides agreed to the terms. Codere also built some credit with banks who will now be more interest in lending to the company. The only entity that can’t be happy about this trade, is the insurance company that had to pay out $15.6M to Blackstone as a result of their collusion with Codere. It should be interesting to see if this remains legal to do, or if this will just spur insurance companies to structure the terms of the CDSs differently.