* Click here for some background if you need it. Bloomberg…
Warlander Asset Management, the hedge fund seeking to invalidate $14.3 billion of Illinois bonds, bought derivatives that will pay off if the state defaults on the debt.
An attorney for Warlander’s co-plaintiff, John Tillman, the chief executive officer of the Illinois Policy Institute, disclosed the firm’s derivative wager at a hearing in Springfield on Thursday. That confirms the assertion made by two big bond investors, Nuveen Asset Management LLC and AllianceBernstein, in a brief arguing that the case should be tossed out — saying it raises questions about Warlander’s motives.
“Permitting activist investors to litigate against the validity of widely held municipal bonds based on their credit default swap bets could introduce a significant destabilizing force into the municipal markets and harm investors and government entities alike,” Nuveen and AllianceBernstin said in their filing on Friday. […]
A credit-default swap contract is similar to insurance on a bond, but the purchaser doesn’t need to own any of the underlying debt to buy one. The swap purchaser can buy the bonds after they default and then tender them to the swap seller to get full payment on the contract.
* Bond Buyer…
The municipal bond market must wait up to two weeks to learn whether a judge will allow a complaint that seeks to invalidate $14.3 billion of Illinois general obligation bonds to proceed.
The case was “well-briefed” and “well-argued” on both sides, Sangamon County Circuit Court Judge Jack D. Davis II said Thursday. “There’s a lot of a material here” and I “believe it is warranted for some further review.” […]
He said he would rule within the next 14 days on whether the case should be allowed to proceed as a taxpayer action complaint. […]
A handful of professionals from institutional investment houses and investment banks attended the hearing in Springfield as the market looks for signals as to whether the courts will conclude that the lawsuit meets the legal criteria to proceed. If so, the case would then be litigated on its merits.
* Warlander’s involvement in the case was defended by Wirepoints…
If they can’t see the difference here, then I can’t really help them.