May 22, 2009 / 7:22 PM / 10 years ago

US CREDIT-McClatchy debt exchange may hinge on CDS holders

 By Karen Brettell
 NEW YORK, May 22 (Reuters) - The likelihood that McClatchy Co’s (MNI.N) bondholders will accept terms of the U.S. publisher’s proposed debt exchange may depend on whether they also hold protection on the debt with credit default swaps.
 McClatchy, which publishes The Miami Herald, Sacramento Bee and more than two dozen other U.S. newspapers, offered on Thursday to exchange $1.15 billion of existing debt for cash and new bonds as it seeks to shore up its balance sheet amid plunging advertising revenues.
 The offer includes paying cash or new, guaranteed bonds for debt maturing in 2011 at 25 cents on the dollar, or 33 cents with early participation in the offer. Bonds maturing in 2014 can also be exchanged for a mixture of cash and new debt at 19.5 cents on the dollar, or 27.5 cents with early participation.
 In a distressed debt exchange, companies rely on bondholders accepting less than the par value of their bonds because they would risk receiving even less if the company files for bankruptcy protection.
 “For bondholders not hedged on the credit, we think the cash on offer for the 2011 bonds is far preferable to keeping holding company bonds that probably would have horrendous recoveries in a bankruptcy,” Jake Newman, analyst at CreditSights said in a report.
 The 2011 bonds jumped 10 cents on the offer to 34.5 cents on Thursday, according to MarketAxess.
 However, “if the CDS buyers also own shorter-dated paper, then it could cause problems for the exchange in that maturity,” Newman said.
 When bondholders also own protection on the debt with credit default swaps, they may be less likely to accept the terms and instead allow the company to fail, wherein they would recover losses from the bonds with the CDS payments.
 Net volumes of around $940 million are outstanding in CDS on McClatchy’s debt, according to the Depository Trust & Clearing Corp.
 The motivation of holders of the CDS, however, is unknown.
 “We believe a large portion of the notes are held in basis, and the success/failure will likely depend on the economics of exiting the package,” Hale Holden and Marc Bromberg, analysts at Barclays Capital, said in a note on Thursday.  
 So-called basis investors took advantage of CDS trading cheaper than the yields paid on the bonds of the same company, which allowed them to buy the debt and also buy protection, locking in a positive gain while removing the default risk.
 Basis investors was a prime driver of demand for corporate debt in recent years.
 “While it is difficult to triangulate, our sense is the majority of the 2011 notes may be hedged against 2 year CDS,” Barclays said.
 This basis trade could be unwound for around 88 cents on the dollar, which would be 12 cents short of the full value of the package, but 8 cents above where the package traded in October, they said.
 “We think acceptance of the offer will to a large extent depend on when it was put on, what contract was used, and whether it was 2 year or 5 year,” they said.
 The cost to insure McClatchy’s debt with 2-year CDS was around 60.5 percent the sum insured on Thursday, or $6.05 million to insure $10 million, plus annual payments of $500,000, according to data by Markit.
 Five-year contracts closed at 64.3 percent upfront, plus annual premiums of 500 basis points, Markit data shows.
(Editing by Chizu Nomiyama)                

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