Cyrus, Omega Call Truce in Sears CDS Fight After Settling Trades

Jan. 2, 2019, 6:16 PM

A bankruptcy judge approved Sears Holdings Corp.’s sale of notes to Cyrus Capital Partners even as he called the outcome “odd,” ending a chapter in the hedge fund’s efforts to keep its payouts on a series of derivatives as low as possible.

The judge, Robert Drain, questioned why other bids for the notes did not emerge after he opened the door for more buyers to step in December, and at least one other potential purchaser had expressed interest. A lawyer for the retailer’s creditors also said the evaporation of buyer demand is puzzling, but said that parties had sold their positions after a Dec. 20 hearing, ending their need to participate in the auction.

“Something happened here,” Ira Dizengoff, the lawyer for the creditors, said at a hearing Jan. 2. “We’re going to investigate the facts of what transpired and figure out if there was something improper in light of issues regarding collusion and bids.”

The judge’s decision is a cap to a long battle over how much money is owed to parties that bought derivatives known as credit default swaps linked to a Sears unit. The instruments offer payouts if the Sears entity defaults, and the size of that payout hinges on the market value of debt from that subsidiary, Sears Roebuck Acceptance Corp.

Payout Battle

A series of money managers, including Omega Advisors and Och-Ziff Capital Management Group, had bought credit derivatives on the SRAC unit, and wanted Sears Holdings to auction off normally worthless debt linked to the entity. That sale could have boosted the payout they received from the derivatives, which is essentially equal to the face value of the debt they insured against default minus the market value of the cheapest debt from the unit. By increasing the supply of publicly available SRAC debt, they could lower the price of those obligations and increase the size of their payout.

Cyrus, which had sold credit derivatives on SRAC’s debt, then took steps to reduce the size of its possible payout. When Sears auctioned off some of the unit’s debt, Cyrus agreed to buy the notes for $82.5 million, but it included a condition: that the bankrupt retailer not sell off any more SRAC debt.

Judge Drain refrained in December from approving the sale after learning of that condition. He said he would allow other bidders to submit offers, and Barclays Plc had said it represented buyers for the notes who would offer more than $100 million.

That bid fell apart, Dizengoff said in a filing the night of Jan. 1. Cyrus separately began to cut its CDS position after a panel that oversees the derivatives decided that certain Sears loans could be used to determine the derivatives’ payout, a lawyer for the hedge fund said in court Jan. 2.

The panel also said it would consider tweaking the swaps’ auction terms. Cyrus’ lawyer said the hedge fund had settled the contracts in the open market and didn’t discuss withdrawing a bid for the notes with any other parties.

©2019 Bloomberg L.P. All rights reserved. Used with permission

To contact the reporters on this story: Claire Boston in New York at cboston6@bloomberg.net; Josh Saul in New York at jsaul15@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Dan Wilchins, Sally Bakewell

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