If The Bondholders Won't Budge, Go Negotiate With Whoever Sold Them Their Credit Default Swaps

The Deal points out that Gannett and McClatchy both recently tried to buy back some of their outstanding bonds at a discount to face value (though at a premium to the market price I am assuming), but were for the most part rejected by their bondholders despite the risk of default should the status quo continue. Why? Well for the bondholders lucky enough to have bought Credit Default Swaps (CDS's), which appears to have been the majority of them, it makes no sense take a haircut on your debt when you can just wait for Gannett or McClatchy to default, excercise your CDS, and collect 100 cents on the dollar. In contrast, McClatchy was reportedly offering 33 cents on the dollar, well below what CDS protection offers.

Hence Gannett and McClatchy's bid to reduce their debt loads via bond buy-backs failed. Here's some advice for these companies... if most of your bondholders were lucky enough to have bought CDS protection, then go and negotiate with the people who sold the CDS's to them. They have a lot to lose if you default since they'll be the ones forced to pay your bondholders. If you are lucky, the CDS-sellers were banks... if you are double lucky they still exist.... and then perhaps these banks can help with your liquidity problems. I'm serious.

Richard Morgan tells about the dire situation Gannett Co. (NYSE:GCI) finds itself in after nearly three-quarters of bondholders, hedged with credit default swaps, declined an exchange offer that expired May 5. Thanks to the CDSs, they stand to get a better payoff if Gannett defaults.

Morgan followed that story up with a report on McClatchy Co. (NYSE:MNI) in The Deal Pipeline on Monday (subscription required). It too tried to do an exchange offer on some troubled bonds, but reported last week that only a small minority of holders went for the offer, valued at around 33 cents on the dollar. Thanks to their CDS hedges, the bondholders can expect 100 cents if McClatchy defaults.

The author owns shares of GCI.