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Creative Financing

22 May 2018 by lberuti

Over the last few quarters we have seen in the market a few examples of creative financing, where some fund managers have helped companies to get some much-needed cash under terms that enable these investors to book profits on credit derivatives transactions. In Europe, Norske Skogindustrier was an example in 2016, and HOV (Hovnanian Enterprises) was another in the US earlier in the year. It seems that there could be another case with SRAC (Sears). ESL Investment is the biggest shareholder of Sears. Last month it urged the retailer to sell some of it businesses, and tabled a proposal to actually buy some of them. As part of the deal, the fund suggested the company should buy back some its debt which trades at the biggest discount to par. It mechanically decreased the value of the CDS contracts referencing Sears as the cheapest debt could be retired from the market, but also raised the suspicion that ESL could have previously sold protection to benefit from the phenomenon…