Coronavirus Tips Odds in $4 Billion Bet Against Troubled Firms

(Bloomberg) -- The coronavirus’s rampage through the global economy could hand $4 billion of winnings to hedge funds that bet against some of the most at-risk companies in the credit-default swaps market.

Prices on the swaps -- derivatives that insure bondholdings against default and are often used by hedge funds to bet against companies with weak balance sheets -- have skyrocketed in recent weeks. In some cases they indicate that investors believe there’s a near 100% probability of a borrower going bust within the next five years.

The much criticized corner of the $10 trillion market for credit insurance enjoyed a comeback last year when it brought at least $1 billion in windfalls to their holders in Europe alone, or more than double the amount of 2018 after a couple of high-profile corporate collapses.

Now, as credit ratings agencies point to a jump in corporate defaults and bankruptcies in the aftermath of the pandemic, the CDS market is on track to reward investors with an even bigger pool of payouts.

U.S. oil producer Whiting Petroleum Corp. and telecom company Frontier Communications Corp., which both filed for bankruptcy this month, have already triggered payouts on a combined $900 million of credit swaps. They are set to become the first coronavirus failures to pay CDS holders when auctions are held to settle the contracts.

As of last month the total single-name CDS outstanding for corporate borrowers was at least $340 billion, according to the latest data from the International Swaps & Derivatives Association.

The following list shows eight borrowers with some of the highest odds of default in the next five years, according to CDS prices from ICE Data Services. The maximum potential payout in each case is calculated using ISDA data.

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