IN 2013 Codere, a Spanish gaming firm, owed money it could not repay. Its bonds were trading at just over half face value. Blackstone, a private-equity firm, offered it a cheap $100m loan. But there was a catch. Blackstone had bought credit derivatives on Codere’s debt that would pay out about €14m ($19m) if Codere missed a bond payment. So Codere delayed a payment by a couple of days to prompt a “technical default”. Blackstone got its payout; Codere got its loan and stayed afloat.
On the satirical “Daily Show”, Jon Stewart, the then host, likened the scheme to the insurance fraud in “Goodfellas”, in which mobsters insure a restaurant before blowing it up. But that missed an important point. Blackstone did not blow Codere up—quite the opposite. As it said at the time, it “provided capital when no one else would, which allowed the company to live and fight another day”. The investors who sold Blackstone credit-derivative contracts had in effect bet that Codere would...Continue reading