Cendant CDS Players Put Pressure On Avis Plan

Players who lost money on Cendant credit-default swaps last week, when the company announced it would not guarantee debt at recently spun-off unit Avis, have been trying to get lenders to persuade the company to change the decision. Traders said it's unusual but not unprecedented for hedge funds and asset managers on the losing end of CDS trades to get a company to change terms. But, it looks like this attempt is doomed: in a conference call last Tuesday the company re-affirmed the plan.

Ahead of that call, however, the speculation caused dramatic spread volatility. "It's still very fluid and details are sketchy," one trader said early last week. "But this kind of movement is not normal."

The price of five-year protection widened to 147 basis points ahead of the spin-off because investors expected Cendant to guarantee its relatively highly levered auto rental segment. Traders were caught off guard when the company issued USD1 billion senior secured financing for Avis and usedInternational Swaps and Derivatives Associationsuccessor language to transfer the debt to a new credit facility, rather than guarantee the debt itself. "All of a sudden, everyone wanted out," one trader said, noting the price of protection snapped into 40bps in just a few hours. "CDS contracts ramped in and everyone long protection got smashed."

Traders said CDS desks that lost money were pressuringJPMorganandDeutsche Bank, the leading lenders, to pressure Cendant's management to change its decision and guarantee Avis' debt in a new loan deal. Officials at JPMorgan and Deutsche Bank declined to comment.Ronald Nelson, cfo at Cendant, did not return calls andHank Diamond, spokesman, declined comment.

Cendant CDS closed at 80bps March 17 and 79bps last Monday, but bounced between 45bps and 95bps throughout. On the conference call, the company reaffirmed its decision not to guarantee the rental car unit, saying it would employ make-whole provisions and redeem outstanding bonds at par. CDS rallied and closed at 49bps last Tuesday.