Market participants expect credit derivative investors--and hedge funds in particular--to more aggressively influence terms of corporate bond issuance as the credit derivatives market grows. Credit protection sellers have the same economic exposure to a company's risk as bond holders and are seeking the same voting and consent rights.
The issue was raised last week, when USD3.6 billion hedge fund BlueMountain Capital Management tried to persuade JPMorgan and Deutsche Bank to alter terms of new bonds issued by Liberty Global's Zurich-based unit Cablecom Holdings. Protection sellers had believed the company was eliminating all Cablecom debt as part of a refinancing, and were surprised by the announcement new bonds would be issued from the unit. Five-year CDS more than doubled from 193 basis points to 430 bps in minutes Wednesday and BlueMountain reportedly lost money. Officials at the fund declined all comment.
The hedge fund asked the underwriters to issue the new bonds from a different Liberty unit, which would have wiped out the value of Cablecom CDS protection as the funds had initially expected. The underwriters declined but market participants said funds are likely to return to pressuring underwriters if a similar situation should occur in the future. Hedge funds have close relationships with the underwriters and are important providers of credit liquidity.
"The more interested parties there are, the more influence they'll have," said one derivatives participant. "My gut is this will happen on a more regular basis as the derivatives market outstrips the cash market and may turn into the tail wagging the dog."