GSO Capital

Blackstone responds to Jon Stewart

December 5, 2013: 2:19 PM ET

Jon Stewart likens private equity execs to movie mobsters. But Blackstone says it really was the romantic lead.

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FORTUNE -- The Blackstone Group (BX) found itself in The Daily Show's sights last night, based on a seemingly-brazen piece of self-dealing that was first uncovered late last month by Bloomberg News.

Here are the basic facts: In the first half of 2013, Blackstone affiliate GSO Capital Partners purchased debt and credit default swaps in Codere SA, a listed Spanish company that operates betting parlors, online gambling sites and other gaming activities. GSO and another firm later purchased a €100 bank loan (via secondary markets) that Codere already had on the books, and then convinced Codere to delay repayment on the debt related to the aforementioned credit default swaps. That delay triggered the CDS, resulting in upwards of $18.7 million in profit for GSO.

Or, as Jon Stewart put it, they used the Goodfellas trick of taking out an insurance policy on a restaurant before burning it to the ground.

The reality, however, may be a bit more complicated.

Spanish law required that 75% of Codere bondholders agree to restructure the bank loans, which originally were designed to mature at the end of June. Unfortunately, a large percentage of those bondholders also held credit default swaps -- just like Blackstone did -- via a so-called basis plays that actually pay more for defaults than for debt repayment in full. What that meant was that the bondholders had little interest in letting Blackstone and its partner push back the maturities, thus leaving the firms with two options:

  1. 1. Allow the debt to mature at the end of June, which likely would have pushed the troubled company into bankruptcy (yet still paid off the CDS, including to Blackstone).
  2. 2. Convince Codere to default, so that bondholders would ratify the restructuring -- thus keeping the company solvent at least through year-end.

In other words, Blackstone would have made money off the CDS no matter what. And, by providing a lifeline, the firm could charitably be viewed as the fireman rather than as the arsonist. In a statement, firm spokesman Peter Rose argued it thusly:

"First, Blackstone thinks that Jon Stewart is the funniest guy on TV. But unlike the wise guys in the clip he used... we put money into Codere to save it from bankruptcy and keep it running when no one else would do so. Codere (working with us and Perella, who were Codere's advisers) had to trigger the credit default swaps, as it was the only way to compel certain bondholders to negotiate. Absent that, Codere may have had to liquidate.

So who benefited from all this?

• The company who avoided a liquidation
• The employees who maintained their jobs
• The company's suppliers who continued to receive uninterrupted payment s for their services
• Other creditors who received their coupon payments from the money we infused into the Company
• GSO and its investors who were compensated for their risk capital

That is not to say that there  not losers in this deal, but not the ones Jon Stewart points to. The losers were sophisticated hedge funds using credit default swaps to bet on the timing of a default. Unlike Blackstone, who invested directly into Codere, these financial investors were not aligned with the interests of Codere, but instead through their use of credit default swaps, were betting on when the Company would default. They were like gamblers betting on the over/under spread, but having no interest in the outcome of the game."

To be sure, Codere remains a company in deep trouble. Revenue is on the decline, and last year it experienced a $104 million loss after three straight years of profitability (this year is expected to be even worse). And Blackstone perhaps could have worked harder to get bondholders to the table, or figured out some way to roll its CDS profits directly into the company (or perhaps tied them to the extended debt, for which there is not yet a CDS market). Or used its connections to find another lender that didn't also have CDS exposure.

But the move wasn't quite as dastardly as The Daily Show made it out to be -- something that perhaps the firm would have communicated to Stewart and Co. had it been asked for comment before airing (Rose says it was not).

Below is the segment. And, yes, it is funny -- including shots taken at media outlets for not covering this in the first place (mea culpa -- I actually hadn't seen the Bloomberg piece until today).

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