Summary: A September 18th New York State Supreme Court ruling will help hedge funds realize significant profits on bonds they purchased recently. As a result of the options scandal on Wall Street, an increasing number of companies are not filing financial reports on time, which causes a technical default on their debt, enabling bondholders to demand immediate payment of principal. Hedge funds have been taking advantage of this situation by buying up bonds of companies that have delayed filings and demanding payment or other concessions. According to Barron’s there are about $36B of bonds at stake here. For example, UnitedHealth Group (UNH) was notified on August 28th that it was in default due to its filing delay. UNH has $500 million in 4.875% notes due in 2015 that currently trade at 96 cents on the dollar. Bondholders would get face value, a 4.12% return, if UnitedHealth was forced to retire the bonds immediately. In comparison, typical investment grade corporate bonds have been averaging a 3.2% return this year. Companies are offering financial sweeteners to give them more time: Medarex (MEDX) offered convertible bondholders $2.50 per $1,000 face value to give them more time to file their earnings; if earnings are not filed by October 24th, the bondholder will receive an extra $10 per $1,000 face value.
Related links: Full article • Vultures Circling Around Vitesse • Companies Implicated in Options Backdating Class Action Lawsuits • The Wall Street Journal: Hedge Funds Play Hardball With Firms Filing Late Financials • Forbes: Hedge Funds' Sidecars
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