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Presented by border. There, Moody's Investors Service projects business defaults will more than triple in 2009, reaching numbers not seen since the 1930s. A Bloomberg news story in early March neatly portrayed the poten- tial that CDSs have to derail efforts aimed at restructuring such high- profile American corporate icons as Ford Motor Co. and Six Flags, which notably owns La Ronde amusement park in Montreal. Investors, the arti- cle explained, had the opportunity to buy Six Flags bonds at 20.5 cents on the dollar and CDSs at 71 cents. If the company defaults, creditors would receive face value of the debt, minus costs. According to a note issued by high-yield strategists at Citigroup in February, a $10-million purchase of credit default swaps in Six Flags would yield a profit of six percentage points — or a cool $600,000 — if the company failed. "Before you had to worry mostly about where you were [in a company's capital structure]," Matthew Eagan, an investment man- ager at Boston-based Loomis Sayles & Co., which manages $7 billion in high- yield assets, told Bloomberg. "Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy." It is this gambling against compan- ies that might otherwise be nursed back to health by conscientious creditors that most rankles Rick Orzy, a senior partner and co-leader of the national bankruptcy and restructur- ing practice of Bennett Jones LLP. He represents mostly public and private placement bond holders in large insolvency cases — like Nortel Networks, Quebecor World, Stelco, Parmalat, and Teleglobe — as well as in international restructurings. He says the very essence of CDSs encour- ages people to bet on stocks and security even though their invest- ment isn't in jeopardy. "The differ- ence [between] CDSs and insurance is that insurance covers you in a loss while a CDS pays out by an event that you yourself can cause," he says. "And insurance companies have to have capital to cover the policies they issue. But people are allowed to write CDSs with no regulation and collect huge fees without ever being able to cover it. It's absurd." While lamenting the fact that CDSs "motivate shareholders in the wrong way — and people have to realize there [are] lots of these things out there, which I think is the real evil," Orzy says, although he doesn't believe the sky is falling because of them. "There are always people around a negotiating table who are motivated by their own economic agendas [and] there [are] lots of situations — like with people selling short stock — that create these kinds of perversities," he tells Canadian Lawyer. "And don't forget, what goes around comes around. If you look at the 10 biggest insolvencies in the last few years, the same half-dozen big holders — mutual funds, insurance companies, etc. — have been involved in almost all of them. If one has CDSs and takes a ridiculous position that causes big losses to the others, well, hey, maybe next time it'll be their turn. So you can get them to temper their positions." Rob Chadwick agrees. And in addi- tion to the human dimension that is always involved in efforts aimed at finding solutions to restructuring companies — a process he likened to a merry-go-round with different stakeholders jumping on and off according to their interests — he says there are also technical ways in which CDSs can be defused before they scuttle a negotiating process. "A lot depends on the terms [and] how a CDS is written," he says. Sometimes, too, he adds, the value of CDSs — especially those written by conduits like the companies that wrote com- mercial paper — are questionable. And in some cases CDSs are bought by other stakeholders who want to improve their positions or simply save the process. "There's no doubt CDS[s] have made things more complicated because they add another variable to an already complicated process," says Chadwick. "But it's like anything else. People are adapting and learning to live with them." ntitled-1 1 EMERGENCY CARE June 15 – 16 | Toronto COMMERCIAL INSURANCE June 15 – 16 | Toronto CORPORATE IMMIGRATION June 17 – 18 | Toronto ADMINISTRATIVE PROFESSIONALS June 18 – 19 | Ottawa August 13 – 14 | Toronto LHIN FORUM June 22 – 23 | Toronto COSMECEUTICALS June 29 – 30 | New York HEALTHCARE M&A and CORPORATE DEVELOPMENT September 9 – 10 | Atlanta ABORIGINAL LAND and RESOURCE MANAGEMENT September 14 – 15 | Vancouver EMPLOYEE TERMINATIONS September 14 – 15 | Halifax September 21 – 22 | Ottawa COMMERCIAL INSOLVENCY September 14 – 15 | Calgary E-DISCOVERY & E-RECORDS September 30 – October 1 | Halifax MOTOR VEHICLE ACCIDENT September 30 – October 1 | Toronto Media Partner ENROLL TODAY! 1 888 777-1707 www.insightinfo.com www. C ANADIAN Law ye rmag.com JUNE 2009 49 5/12/09 9:38:30 AM