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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.

Securities lending by investment funds has reached its highest level in a decade, as demand for corporate bonds surged more than 30 percent over the past 18 months, Reuters reported. Global money managers generated nearly $6 billion in revenue during the first half of the year, loaning out stocks and bonds that often land in the hands of short-sellers such as hedge funds. It was the best performance since the start of the global financial crisis in 2008 and current volatility trends are expected to keep the upswing going, according to research firm IHS Markit. New regulatory disclosure rules that took effect last year and fresh academic research show, however, that there can be a bigger downside to securities lending than previously thought. For one, mutual funds may overweight high-demand stocks and bonds because they generate higher fees from short-selling hedge funds. Securities lending, especially for money managers keeping a bigger portion of the fees from fund investors, could distort stock-picking behavior and hurt performance, said Travis Johnson, a professor at the University of Texas at Austin. 

Two senior Goldman Sachs bankers paid bribes and stole and laundered money from a Malaysian sovereign-wealth fund, U.S. prosecutors allege, putting the bank at the center of one of the biggest financial frauds in history, the Wall Street Journal reported. Former Goldman partner Timothy Leissner, then its head of Southeast Asia, pleaded guilty to conspiring to launder money and violate foreign antibribery laws for helping siphon off billions of dollars from the fund, known as 1Malaysia Development Bhd, or 1MDB, according to filings unsealed yesterday. Former Goldman managing director Roger Ng, and the alleged mastermind of the fraud, Malaysian financier Jho Low, were indicted on three counts of conspiring to violate foreign antibribery laws and launder money.

Moody’s Investors Service said that companies owned by the 16 largest private equity firms have lower credit quality than those of similar, non-private equity owned companies, WSJ Pro Bankruptcy reported. In a recent report, the ratings agency said that weakening credit worthiness and loose safeguards could mean trouble for private equity firms when economic conditions change. The report says 92 percent of companies owned by the top 16 private equity firms are rated B2 or below, compared to 40 percent of companies without private equity backing. Driving the disparity is private equity’s appetite for shareholder returns and risky debt, according to Moody’s analyst Julia Chursin. Since 2009, Moody’s say it has rated 308 companies owned by the top 16 private equity firms, 99 of which have paid debt-funded dividends to private equity shareholders.

Guggenheim Partners, which recently merged its restructuring business with Millstein & Co., sees opportunities in helping struggling local government creditors as budget impasses and pension liabilities put pressure on municipal bond issuers, Bloomberg News reported. "We’re starting to see some stress" on the state and local government side, driven by pension and other post-employment benefits and liabilities, which states are having "an impossible time funding," said Elizabeth Abrams, a senior managing director at Guggenheim, who came over from Millstein when the two advisory firms combined this month. Companies have also been taking on more debt relative to assets, while offering weaker loan safeguards to investors. As a result, one place the combined firm is looking for opportunities is reviewing companies’ debt documents to advise them on how to position themselves in negotiations with lenders, Abrams said.

Solus Alternative Asset Management LP didn’t kill Toys “R” Us Inc., the hedge fund said in a letter to its investors after coming under pressure for its investments in the liquidating retailer, Bloomberg News reported. “Solus did not force Toys ‘R’ Us to liquidate,” Chief Investment Officer Christopher Pucillo said in the Sept. 6 letter seen by Bloomberg News. “It was the culmination of a host of factors, including a decade-plus of excessive leverage, mismanagement and the increasing effects of competition from the likes of Amazon and Walmart.” The two-page letter lays out a timeline and narrative to rebut allegations that the refusal of Solus and other creditors to compromise on their investments forced the company to wind down when it could have lived on through a sale. New York-based Solus invested $20 million in a Toys “R” Us loan before its bankruptcy and added stakes in its senior debt after the chapter 1u1 filing, according to the letter. As the company closes its operations, Solus has attracted criticism from worker groups who say they deserve hardship pay after losing their jobs and that Solus and other lenders share the blame for the company’s failure to restructure.