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U.K. Pub Company Stuns Traders Betting on Worthless Credit Swaps

U.K. Pub Company Stuns Traders Betting on Worthless Credit Swaps

(Bloomberg) -- U.K. pub company Stonegate’s announcement on its debt refinancing plans stunned traders who had bet heavily that the firm’s credit insurance would soon prove worthless.

Stonegate, which runs over 700 bars across the U.K. -- including the Slug and Lettuce, Walkabout and Yates’ chains -- said on Wednesday that it will use an existing funding vehicle to guarantee at least some of the new notes and loans it plans to offer. It’s expected to sell 1.35 billion pounds ($1.74 billion) of bonds for its owner TDR Capital’s acquisition of rival U.K. pub chain EI Group Plc, possibly as early as this month.

The company’s credit-default swaps subsequently jumped as high as 250 basis points, up from around 80 on Tuesday, according to people familiar with the matter. Traders had expected Stonegate to use a new funding unit to back the forthcoming issuance, thereby rendering almost $300 million of credit default swaps worthless because they would be left with no debt to insure.

A company representative declined to comment.

U.K. Pub Company Stuns Traders Betting on Worthless Credit Swaps

The cost of insuring Stonegate’s existing debt against losses more than doubled on Wednesday to 200 basis points at 3.30pm in London, according to ICE Data Services. The contracts had previously plummeted 75% over the past year.

“Seeing a company explicitly reference CDS in a press release or cleansing statement is pretty unprecedented in European High Yield,” Steven Hunter, CEO and founder of high-yield analytics firm 9Fin Ltd, told Bloomberg News.

The company had previously said it was 90% certain that it would issue the debt out of a new vehicle, according to management’s comments on an investor call reported by CreditSights analysts last month.

Barclays Plc, Goldman Sachs Group Inc., Lloyds Banking Group Plc and Nomura Holdings Inc. are arranging the upcoming buyout financing after having provided bridge loan financing. Barclays is acting as agent and arranger, according to the bond documents.

CDS Market

Credit derivatives that fell out of favor after the financial crisis are returning to vogue as default rates rise and high-profile failures pay out for shortsellers. Last year buyers of credit insurance received windfalls from contracts linked to French retailer Rallye SA and U.K. travel company Thomas Cook.

CreditSights analysts had recommended taking profits on selling Stonegate’s five-year credit protection last month, saying there wasn’t certainty about the issuing structure of the new bonds.

“With CDS at all-time tights, a CDS sucker punch from the company’s bankers cannot be entirely ruled out,” the CreditSights analysts wrote in last month’s note. “The game is still very much on.”

To contact the reporters on this story: Katie Linsell in London at klinsell@bloomberg.net;Laura Benitez in London at lbenitez1@bloomberg.net

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

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