The truth about Blackstone and Codere
Iâ€™ve always felt that the Daily Show should do more financial stuff, and thereâ€™s no doubt that Wednesdayâ€™s piece on Blackstone was funny. But it was also extremely credulous about a single Bloomberg article from October.
Jon Stewart â€” a man who, according to the NYT, might be â€śthe most trusted man in Americaâ€ť â€” said that the Bloomberg piece was â€śunbelievable storyâ€ť of how Blackstone engaged in â€śincredibly egregious behaviorâ€ť which â€śshould be illegalâ€ť â€” strong words, which elicited smart reactions from both Matt Levine and Dan Primack.
In a sign of the degree to which Bloomberg is implicitly trusted, however, all concerned â€” Bloomberg View, the Daily Show, Fortune â€” take at face value the core assertion made by Bloomberg News: that Blackstone made a profit of â€śfrom 11.4 million euros to as much as 13.7 millionâ€ť on its Codere trade.
The article attributes those numbers simply to â€śdata compiled by Bloombergâ€ť, but in fact itâ€™s quite easy to see where they came from. Blackstone, according to Bloomberg, â€śheld 25 million to 30 million eurosâ€ť of credit default swaps on Codere. It then forced Codere into a technical default (repaying a loan two days late) â€” which triggered those swaps and forced a payout at 45.5 cents on the dollar. Therefore, the amount that Blackstone received on its CDS position was somewhere between â‚¬11.375 million and â‚¬13.65 million.
But that number is gross revenue, not profit. The profit on Blackstoneâ€™s CDS position can be looked at as being the difference between that payout, on the one hand, and the amount that it spent buying the CDS in the first place, on the other. (Although in fact, as weâ€™ll see, itâ€™s more complicated than that.) Unless we have some idea of Blackstoneâ€™s cost basis on this trade, we have no idea what its profit was. Bloomberg, however, seems to simply assume that Blackstoneâ€™s cost basis for the CDS was zero â€” that it managed to accumulate all that insurance without paying anything for it whatsoever.
To be sure, Blackstone are smart operators, and I donâ€™t doubt that theyâ€™re making a profit on this trade. But we really have no idea how big that profit was.
And in any case the whole thing was part of a much bigger trade, which has yet to be unwound. Primack explains that â€śin the first half of 2013, Blackstone affiliate GSO Capital Partners purchased debt and credit default swaps in Codereâ€ť â€” in other words, it entered into a basis trade, where it bought debt in a troubled company and also bought insurance on that debt. But Codere was already a deeply troubled company in the first half of 2013, which means that Blackstone would have had to pay some nontrivial amount of money to buy its CDS position in the first place.
So before we take Levineâ€™s lead and admire the â€śmajestic beautyâ€ť of the Blackstone deal, letâ€™s wait and see just how profitable it was. Weâ€™re not going to know that for a while, since Blackstone is now a major creditor of Codere, which is (still) at very high risk of defaulting on its debt: when the original Bloomberg article was published in October, Codereâ€™s bonds were trading at a mere 53 cents on the dollar.
The way that Blackstone made some unknown amount of money on the CDS leg of its trade, then, was to take a huge direct exposure to Codere on the other side of its trade. Itâ€™s still entirely plausible that Blackstoneâ€™s current exposure to Codere could be written down sharply, and could even end up being bigger than the profits on its CDS trade.
Two other points are worth making, here. The first is, as Primack points out, that absent new money from Blackstone, Codere was pretty certain to default in any event. As a result, Blackstone can credibly be painted as the white knight here â€” as the company which managed to find a way to funnel money from the CDS market back into Codere, thereby avoiding a bankruptcy filing. Thatâ€™s certainly Blackstoneâ€™s view: spokesman Pete Rose says that the trade saved jobs at Codere, as well as lots of money for Codereâ€™s supplier-creditors.
Whatâ€™s more, itâ€™s worth stopping to ask who Blackstone bought the CDS from, in the first place. Not many people are in the business of writing single-name CDS on a troubled company like Codere, and the people who do engage in such transactions tend to be highly sophisticated investors â€” and indeed are probably engaging in some kind of relative-value trade of their own.
Add it all up, and I really donâ€™t think that what Blackstone did was particularly egregious; thereâ€™s certainly no reason to believe that it should be illegal. The Daily Show basically accuses Blackstone of setting fire to Codere so that it could collect the insurance proceeds â€” but in fact Blackstoneâ€™s actions were a large part of the reason why Codere managed to survive. Far from being a pile of ashes, Codere now has a real chance of avoiding liquidation. For a piece of clever financial engineering, thatâ€™s an uncommonly positive societal outcome.