Maybe Companies Will Get Rid of CDS

In 2015, a rural wireless company called Windstream Holdings Inc. spun off some of its assets into a separate company. This put those assets beyond the reach of Windstream’s creditors, in pretty clear violation of the covenants in Windstream’s bonds. Much later, in 2017, a hedge fund called Aurelius Capital Management LP acquired some of those Windstream bonds and sued, claiming that Windstream had violated its bond indenture and was in default. Windstream fought back hard, but eventually Aurelius won. This February, a federal judge ruled for Aurelius and awarded it $310.5 million plus interest; a few weeks later, Windstream filed for bankruptcy.

In a sense, this is a straightforward vindication of the rights of creditors: Windstream violated its indenture, and Aurelius called it out and punished the violation. But it doesn’t seem to have done much good for Windstream’s actual creditors: Other than Aurelius, most of Windstream’s bondholders supported the company and voted against the default, and Aurelius’s court victory and the subsequent bankruptcy drove down the value of Windstream’s bonds. It was an abstract vindication of creditors’ rights that happens to have cost the creditors tons of money.