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Cyrus Capital Becomes Key Challenger to Sears CDS Maneuver

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.

Highest Bidder

Sears is looking to sell the notes to the highest bidder ahead of the auction, which is expected to take place on Nov. 26 or later. A court hearing on its request is scheduled for Thursday.

To execute its plan, Sears also needs a committee of derivatives traders to approve the debt as eligible for the auction. The inter-company notes were included in a preliminary list, though the committee is still discussing the matter. The retailer could reap tens of millions of dollars if the sale is successful, according to some estimates. But the sale would hurt sellers of CDS protection who might be on the hook for a bigger payout.

Cyrus is believed by market participants to be one of the largest sellers of the CDS contracts, according to people familiar with the market. The firm is also one of the 15 members of the derivatives committee setting the rules of the auction.

The investment firm’s involvement with Sears is not limited to the CDS market. Cyrus had also been in discussions to provide a financial lifeline to the retailer to keep its stores open through the holiday season. Sears instead got a $350 million loan from specialty lender Great American Capital Partners, according to a court filing.

To contact the reporter on this story: Davide Scigliuzzo in New York at dscigliuzzo2@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;Rick Green at rgreen18@bloomberg.net, Sally Bakewell, Shelley Robinson

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