From the November 2007 issue of Treasury & Risk magazine

Silver AHA Award in Financial Risk Management

When Cendant Corp. split into four separate companies last year, it created a thorny problem for the credit default swap market, where investors buy and sell protection on corporate debt. It also created a unique opportunity, which the treasury team at Avis Budget--one of Cendant's legacy companies--spotted: "It would have been easy for someone to ignore this. I think we realized the opportunity because we took time to think about the potential risks and rewards," says Avis CFO and Treasurer David Wyshner.

The problem was that Cendant's break-up, which was accompanied by the redemption of $3.6 billion of its outstanding debt, left default swap investors without any underlying bonds to reference--and there was no longer a Cendant to issue replacement debt. The value of the swaps plummeted. Investors were dismayed, but Avis' treasury team started to wonder if the anomaly could be resolved in a way that would benefit both the company and credi0t derivatives market. "Credit derivative investors are not traditional corporate stakeholders, and that's one of the things that makes this transaction unique and innovative," says Wyshner.

What Avis did was assume Cendant's role as a reference entity for the existing default swaps. That may sound simple, but it required painstaking study of the legal niceties of the swap market. But by stepping in, Avis created tremendous value for investors left high and dry by the Cendant break-up. Acting as a go-between, Deutsche Bank presented Avis Budget's proposal to default swap investors and negotiated a payment from each.
In total, Avis netted $14 million without incurring any economic cost. That's not the kind of opportunity that comes along very often, says Wyshner: "It's just a really neat transaction to have been involved in."


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