Rallye Short Sellers to Collect $522 Million Payday on Credit Swaps

(Bloomberg) -- Hedge funds that bet on the demise of Rallye SA will get the pay day they chased for years after a bond auction to settle derivatives linked to the indebted retail group.

Buyers of credit-default swaps on the parent of French supermarket chain Casino Guichard-Perrachon SA will collect 87.5% of the amount insured, according to final auction results on Thursday. That equates to a payout of $522 million, based on data from the International Swaps & Derivatives Association.

Rallye’s swaps were triggered after the group was placed in creditor protection last month to avoid collapse. Short sellers had been circling since 2015, when Muddy Waters Capital published a scathing attack on the debt-laden and opaque corporate web that allows Casino Chief Executive Officer Jean-Charles Naouri to keep control.

“Today is the final conclusion of a bet, and in the end it looks like it was worth taking,” said Anthony Giret, an analyst at Spread Research in Lyon, France. “Many people have thought for some time that Rallye’s debt load isn’t sustainable.”

Diameter Capital Partners is among those that may stand to gain from the settlement. Scott Goodwin’s $1.7 billion credit fund has bet against Rallye and recommended that investors buy swaps on its debt.

It’s one of the most high-profile in a series of failures paying off for short sellers. Market makers including Citigroup Inc., which has been involved in long and short positions on Rallye, and BNP Paribas SA, which offered bets on the timing of a default, participated in the settlement auction.

Rallye, the largest in a series of indebted holding companies Naouri controls, still faces months of negotiations for a debt restructuring in which lenders are expected to take losses.

Rallye’s unsecured creditors are likely to swap their debt for new shares and take control of the company, according to Giret at Spread Research. Still, the safeguard procedure in France is so flexible that Naouri could keep control, an outcome that would be almost unheard of in the U.S. or U.K.

The level of payment from credit swaps may influence the restructuring talks, according to Alain Lopez, an analyst at brokerage firm Octo Finances in Paris.

“This should be a strong indication to Rallye’s administrators that the company’s debt is unsustainable and it needs a short-term solution,” said Lopez. “It’s not enough to kick the can down the road by extending maturities. Rallye debt needs a considerable haircut soon.”

--With assistance from Samuel Dodge.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses

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