Cyrus Capital Becomes Key Challenger to Sears CDS Maneuver

(Bloomberg) -- Cyrus Capital Partners has emerged as the key challenger to Sears Holdings Corp.’s plan to raise money by creating a bidding war among hedge funds that bet hundreds of millions of dollars on the retailer’s failure.

The investment firm founded by Stephen C. Freidheim filed objections with a U.S. bankruptcy judge and a committee of derivatives traders to the retailer’s plan to auction up to $900 million of notes that are essentially loans from Sears unit to another, documents show. A sale of the debt could affect the payout on about $400 million of credit-default swaps tied to Sears.

“Permitting the selling debtors to flood the market with inter-company claims opens a dangerous door to potential manipulation of claims pools,” New York-based Cyrus said in the filing.

The challenge pits Cyrus -- which is believed by market participants to have wagered on Sears’s survival by selling default insurance -- against a group of hedge funds including Brigade Capital Management, Omega Advisors and Och-Ziff Capital Management. The latter firms are awaiting payouts on credit swaps they purchased, people with knowledge of the matter said last week.

The buyers of the credit-default swaps, or CDS, have faced the prospect of getting paid only a small amount on their trades because they’re linked to a part of Sears that now has little debt outstanding. If Sears were to flood the market with new notes, those funds could potentially use them to collect on the derivatives in a settlement auction that’s set to take place in the coming weeks.

Anonymous Request

Cyrus was also linked to a request, filed with a CDS market committee this week, that seeks to exclude the notes from the CDS auction. While the request wasn’t attributed to a person or firm by name, Svetoslav Nikov, a partner at Cyrus, was listed as the author in the metadata of the document posted on the website Tuesday. By Thursday morning, that file had been replaced with a newer version with no author.

A representative for Cyrus declined to comment, and Nikov didn’t respond to a request for comment.

The debt in question would typically be worthless for a company in bankruptcy. But its potential inclusion in the auction could have a big impact on the amount paid to hedge funds and other market participants who bought default insurance on Sears’s debt.