The FTX Trade That’s Tempting Oaktree and Baupost: Credit Weekly

(Bloomberg) — Editor’s Note: Welcome to Credit Weekly, where Bloomberg’s global team of reporters will catch you up on the hottest stories of the past week while also offering you a peek into what to expect in credit markets for the days ahead.

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It will be months, if not years, before FTX’s customers know how much they’ll get back from the failed crypto exchange. But as Bloomberg’s Justina Lee and Rachel Butt reported this week, some of the world’s savviest distressed debt investors are already looking to make a play.

For such firms, which profit by picking through the ruins of failed companies, bankruptcies this size don’t come around often. That helps to explain why the likes of Baupost Group and Oaktree Capital Management have inquired about buying claims of customers with assets stuck on the exchange. (Both firms declined to comment to Bloomberg News.)

The calculus behind any ultimate bets is tricky. First, customers would need to become desperate enough to accept a fraction of what they’re owed — via a transaction known as a claims trade — in return for getting some cash now.

The initial numbers weren’t promising. Restructuring professionals tasked with overseeing the FTX cleanup, led by one-time Enron liquidator John J. Ray III, tallied up $7.9 billion of liabilities owed by the main units of Sam Bankman-Fried’s crypto empire. That compares with more than $1 billion of digital assets turned up so far, and about $1.2 billion of cash. A lawyer representing FTX’s estate told a judge last month that a substantial amount of the firm’s assets “ have either been stolen or are missing.”

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If the missing assets don’t turn up, prospective claims buyers will be weighing the odds that FTX’s caretakers can find them elsewhere. FTX has already hinted at clawing back donations to political groups, and there may be assets to recover in the Bahamas. FTX caretakers are also trying to get their hands on $440 million of Robinhood Markets Inc. shares tied to Bankman-Fried’s former trading house, Alameda Research.

Claims traders will also need to assess whether the value of customers’ crypto assets can rebound. At less than $17,000, Bitcoin still trades substantially below its $50,000 level of a year ago, but also well above its sub-$10,000 levels in the pre-pandemic era.

Japan Shocker

The Bank of Japan jolted the nation’s debt markets this week when it raised its cap on 10-year bond yields. The move rekindled worries that a broader policy shift by the BOJ — the last holdout in a world of inflation-fighting central banks — will cause bigger disruptions.

As Bloomberg’s Ayai Tomisawa wrote, one key measure that investors will be watching is the cost of hedging against losses on the yen. Amid a surging dollar, those hedging costs jumped in the past year. That, along with plunging bond prices in the US and Europe, prompted Japanese investors to pull back from buying debt in overseas markets.

This was a big deal for some of the world’s largest fixed income markets, including US corporate bonds, because Japanese investors were a significant part of the buyer base. Many investors are now looking for an opportunity to chase yields overseas again once hedging costs ease.

China Developers

China stepped up support for its debt-laden property sector, with its central bank saying it will guide financial institutions to support mergers and acquisitions in the industry and help defuse risks and improve financial conditions of top-tier developers. China’s securities regulator also said it will allow qualified developers to secure a backdoor listing via listed peers. Beijing’s policy bazooka has fueled an advance in the bonds and shares of developers, although there are signs the rally is faltering.

Meanwhile, a key domestic unit of Country Garden Holdings Co., China’s top developer by sales, plans to sell as much as 1 billion yuan ($143 million) of three-year onshore bonds and was expected to start building orders on Thursday. It’s the latest bond issuance under a state-guarantee program that first emerged in August.

Elsewhere:

• Kazakh financial firms have been scooping up Russian government debt at a steep discount from investors unable to exit the market because of sanctions and other restrictions imposed after the invasion of Ukraine, people familiar with the matter told Bloomberg News

• Goldman Sachs is in discussions with investors about selling around $4 billion of subordinated debt that lenders backing the buyout of Citrix Systems have held for months, according to people with knowledge of the matter. The timing of the transaction is dependent on the release of new audited financials, which aren’t expected until the new year, said the people.

• So-called negative carry in closed-end municipal bond funds, driven by the sharp increase in short-term bond yields, is putting funds at risk of more dividend cuts

• Private equity firms are getting a preview of what 2023 has in store for them. First, CD&R had to scale back its deal for the purchase of Atalian, a French services business. Then, BC Partners announced it was handing over the keys of Spanish bridewear maker Pronovias to lenders led by Bain

• A group of lenders to Vista Equity Partners’ Finastra Group Holdings Ltd. have retained financial and legal advisers as the financial software company faces more than $4 billion of debt maturities in 2024. The lenders are working with PJT Partners and Gibson Dunn & Crutcher

–With assistance from Wei Zhou, Rachel Butt, Justina Lee, Steven Church, Jeremy Hill, Ayai Tomisawa, Luca Casiraghi, Hannah Benjamin-Cook, Dana El Baltaji and Andrew Monahan.

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