United Natural Foods Inc. (UNFI) has sued Goldman Sachs, which advised it in its recent acquisition of Supervalu, changing that Goldman put its own interests ahead of those of its client.
At issue, the Wall Street Journal reports, “is a roughly $2 billion financing loan Goldman arranged for United Natural Foods on the deal. The company alleges that Goldman arranged the financing in a way that hurt United Natural Foods but benefited the financial firm and its hedge-fund clients that had placed bets in the credit-default swap market against Supervalu. The company also accuses Goldman of taking advantage of the deal’s provisions to extract more money from United Natural Foods.”
The Journal describes the dispute this way:
“Originally, the deal called for United Natural Foods to retire Supervalu’s $1.6 billion in debt. To investors who had bet against Supervalu in the credit-default swap market, this was disastrous - they stood to lose big if the debt was extinguished. Some $470 million in Supervalu credit-default swaps was outstanding at the time of the deal, the suit said.
“Instead of retiring the Supervalu debt, Goldman persuaded United Natural Foods to add Supervalu as a co -borrower on the loan, the suit said, keeping Supervalu CDS trades alive.
“Only after the deal closed, the suit contended, did United Natural Foods learn that Goldman had hedge-fund clients holding the Supervalu CDS, which doubled in value when the deal terms added Supervalu as a co-borrower. Some of those same hedge-fund clients also bought into the United Natural Foods financing loan, the suit alleged.
As a result, United Natural Foods said in the suit, those holders now have an incentive to “manufacture” a default on the United Natural Foods debt to win their CDS bets against the company—though no hedge-fund holder has done so.”
At issue, the Wall Street Journal reports, “is a roughly $2 billion financing loan Goldman arranged for United Natural Foods on the deal. The company alleges that Goldman arranged the financing in a way that hurt United Natural Foods but benefited the financial firm and its hedge-fund clients that had placed bets in the credit-default swap market against Supervalu. The company also accuses Goldman of taking advantage of the deal’s provisions to extract more money from United Natural Foods.”
The Journal describes the dispute this way:
“Originally, the deal called for United Natural Foods to retire Supervalu’s $1.6 billion in debt. To investors who had bet against Supervalu in the credit-default swap market, this was disastrous - they stood to lose big if the debt was extinguished. Some $470 million in Supervalu credit-default swaps was outstanding at the time of the deal, the suit said.
“Instead of retiring the Supervalu debt, Goldman persuaded United Natural Foods to add Supervalu as a co -borrower on the loan, the suit said, keeping Supervalu CDS trades alive.
“Only after the deal closed, the suit contended, did United Natural Foods learn that Goldman had hedge-fund clients holding the Supervalu CDS, which doubled in value when the deal terms added Supervalu as a co-borrower. Some of those same hedge-fund clients also bought into the United Natural Foods financing loan, the suit alleged.
As a result, United Natural Foods said in the suit, those holders now have an incentive to “manufacture” a default on the United Natural Foods debt to win their CDS bets against the company—though no hedge-fund holder has done so.”
- KC's View:
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I have a rule - I don’t comment on stories where credit-default swaps are the main point of contention. Everything I know about credit-default swaps I learned from The Big Short…
