Hedge Funds May Pocket $250 Million From Thomas Cook Collapse 

(Bloomberg) -- Hedge funds that bet 178-year-old U.K. travel firm Thomas Cook Group Plc would go bust are in line to share payouts of almost $250 million.

Investors including Sona Asset Management and XAIA Investment GmbH holding Thomas Cook default insurance will receive 90% of the amount covered by the instruments, according to final results of an auction on Wednesday.

These securities, known as credit-default swaps, are triggered when a company fails to pay its debt and are used by investors to make negative bets on borrowers or as hedges for their bond investments.

The travel company, which employed 21,000 people, went into liquidation last month after a rescue package backed by Chinese shareholder Fosun Tourism Group, fell through. Thomas Cook’s collapse was one of the U.K.’s largest corporate failures of recent years and sparked a vast logistical operation to repatriate more than 150,000 stranded tourists.

While the hedge funds and other investors that bought credit protection on the company can now collect their winnings, their bet wasn’t always assured.

The Fosun-backed rescue proposal had included a plan to convert debt into shares. That could have left the default swaps with no exposure to insure, rendering them worthless.

A group of funds that held swaps on Thomas Cook hired a lawyer and devised a plan to derail the $1.1 billion rescue unless it guaranteed a swaps payout. The maneuver was ultimately not needed because the bailout fell through when Thomas Cook required an extra 200 million pounds ($258 million).

Citigroup Inc. is among dealers that are on the hook to pay out on the swaps after Bloomberg reported earlier this year that the U.S. bank sold credit insurance on Thomas Cook. A spokesman for Citi declined to comment on the bank’s trading positions.

CDS trades are becoming more common as a slowing European economy drives increasing numbers of companies into distress. This is Europe’s fifth swaps payout this year following settlements on companies including U.K. fashion retailer New Look and French supermarket owner Rallye SA.

Thomas Cook contracts under 2003 CDS rules were triggered when the company filed for chapter 15 bankruptcy protection in the U.S. on Sept. 17. Swaps governed by 2014 definitions are paying because Thomas Cook failed to repay its debt after an event of default on its bonds.

To contact the reporters on this story: Katie Linsell in London at klinsell@bloomberg.net;Irene García Pérez in London at igarciaperez@bloomberg.net

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

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