i am not sure if there are delphi credit default swaps trading, but if there were then the long bonds can be hedged with the the credit default swaps
well the 2 strategies employed mostly were long stock and short delphi debt, and short delphi debt and long delphi puts. And then there are the crazies who just went net long delphi bonds. http://www.thestreet.com/_rms/markets/emmatrincal/10244891.html http://www.thestreet.com/_rms/markets/emmatrincal/10239516_2.html
alot of them are if they were long delphi debt or common. I still dont understand how they were blind sided. There was a guy here who said they werent, so why was the bond trading like they werent going bankrupt, it should have been pricing in bankruptcy, it only did at the last possible moment. It just boggles the mind, that suppovily the best of the best of the best could not have seen this coming, like I said was it stupidty or just plane greed.
many of the fundamental based hedge funds out there are just looking for opportunities where there is a strong catalyst with definitive dates. i can see why those types of hedge funds would want to get involved with the Delphi situation because it obviously has a strong catalyst and the timing is clear. after finding trades with this criteria, the rest is forming an opinion on whether to go long or short. how do they form this opinion? heck the hedge funds don't have access to company management or union leaders. 99.9% of them will not have a single employee who has initmate knowledge of unions or how labor negotiations work in the auto parts industry. can you imagine a hedge fund hiring a former factory worker from Detroit or a union member? lol! all the hedge fund can do is read the press releases and talk to sell side analysts, and form their opinions that way. as you noted, most of the analysts were saying "buy" and they gave wonderful, detailed, and elaborate reasons that made sense. plus the expected return was huge. these reasons are perfect for the hedge fund to justify the trade. "delphi is undervalued compared to other auto-parts makers, there is a strong catalyst, all these sell-side analysts think the company will strike a deal with GM, I do too..."
also, in a chapter 11 the existing equity usually become worthless but the existing debtholders will usually get new debt and equity after the company emerges from chapter 11, so the existing debt is not worthless like the existing equity. also, if the company had to just liquidate all its assests, the cash would go to the debtholders. maybe the buyers have done the analysis, i don't know, just guessing.
Thanks for posting this, I just read through the thread and was going to post something quite similar in response to the question of "why would someone go short the stock and long the bonds?" The idea is that the bondholders have priority over common stock holders during bankruptcy proceedings. Might also be possible to time things in a manner such that the position can be closed prior to bankruptcy. For the record, the first time that I heard this type of pairing mentioned was this spring re: GM.
I've never traded bonds, so I can't comment on this from a practical perspective, and my bond class in uni is boring me to tears right now, but that's another story. Anyways, you are absolutely right. Just because it's a potential strategy doesn't mean that it's guaranteed to work, is risk-free, or is lacking the potential to rack up large losses.
but the problem is that you must have alot of the debt to even matter, i remember back in the old mirant days, alot of the junior debt holders, couldnt even get a date to have their hearings because they didnt own enought of the debt to matter.
By the way, as expected , the DPH bonds are not down nearly as much as was speculated. Maybe a 10-20 % hit (in total value, not % ofpar) is all. Large but not nearly the cataclysmic effect that was expected by some here.
In a bankruptcy, unsecured debt holders typically receive equity in the reorganized company in exchange for their bonds. Historicaly owning stub equity in a lot of defaulted debt has had some tremendous returns within six months to a year of coming out of default. KMART was one recent example.