In the world of high finance and hedge funds, you can buy “insurance” on just about anything. The recent Caesars bankruptcy filing is an instructive case in point, both in terms of the process of buying and selling credit default swaps (default insurance) and how the process can be influenced, if not directly manipulated, by key players.

It’s all about the timing

It turns out that with the recent Caesars bankruptcy filing, the question was not if, but when. Almost all of the parties involved were reasonably certain Caesars was going to end up in bankruptcy, the question was when. A related question who was going to lose the game of musical chairs between Caesars debtors and management as the company transferred assets around to maximize residual value after the reorganization.

Elliott Management Scalped Blackstone In Caesars Bankruptcy Filing

It turns out the answer to the first question was sooner rather than later, and that was perfectly fine by Paul Singer and Elliott as they held a substantial position in Caesars CDS sold by Blackstone’s GSO group. The answer to the second question is till up in the air and is likely to be settled in court.

Elliott Management: Complex interactions between bondholders and debtors in Caesars bankruptcy filing

Caesars and its private-equity backer, Apollo Global Management, have been talking with creditors for over a year, and tried to negotiate a bankruptcy plan with some of them over the summer. And as a number of the funds trading Caesars CDS also own the firm’s debt, they have been participating in the bankruptcy talks.

Blackstone’s GSO is the owner Caesars bank loans and supported Apollo’s reshuffling of Caesars’s assets in the first half of 2014. More recently, Apollo has been bargaining separately with bondholders, including Elliott Management, and GSO, noted people familiar with the talks. The key point of disagreement was when the company would actually file for bankruptcy.

The senior bondholders that recently agreed to support Apollo’s plans (including Elliott) required a guarantee Caesars would put the unit in bankruptcy protection by Jan. 15 for their support. According to a source close to Elliott Management, the bondholders wanted a deadline to stop Apollo from transferring further assets or cash and to trigger a default event before the CDS contracts they owned expired in March.

Loan holders including GSO had also been in talks with Apollo, but broke off negotiations in mid-December. They were angry with Apollo’s negotiating style and the terms it offered, and hoped that withholding their support would pressure management to postpone bankruptcy until after the CDS contracts they had sold expired, but that did not happen.