When Sears Holdings Corp. collapsed into bankruptcy last month, bearish credit-derivatives traders thought they had a winning bet. Now their trades are threatening to go awry, the latest instance of discord between participants in the multitrillion-dollar credit protection market, WSJ Pro Bankruptcy reported. Away from the retailer’s court-supervised bankruptcy, tensions are developing between hedge funds on opposite sides of insurance contracts tied to bankrupt subsidiary Sears Roebuck Acceptance Corp. (SRAC). Insurance buyers are struggling to come up with enough eligible SRAC securities to deliver into the auction. The scarcity of eligible SRAC debt means that credit default swap holders including Och-Ziff Capital Management Group LLC could recover fewer insurance dollars than they otherwise might. Now some insurance holders are seeking to have additional SRAC debt obligations declared eligible in order to juice returns in the auction. So far, the International Swaps and Derivatives Association’s Determinations Committee has approved less than $300 million in eligible SRAC debt obligations, compared with more than $400 million in net outstanding credit derivatives.
