Analysis: What happened to Pershing Square’s BP swaps

An analysis of Pershing Square’s BP CDS trade and BP’s latest financials.

Pershing Square’s latest third quarter investment letter covered a number of past, present and future investments – with one notable exception: BP CDS.

The reason for the omission could be because of the significant tightening that has occurred in BP CDS over the summer and fall. BP swaps are less than half of what the fund said they were paying on average when the trades were first initiated during the second quarter.

Rough estimates put potential losses at over $700,000 per $10 million notional. Pershing Square has not disclosed how much in total notional it bought of BP CDS, however, a recent Dealbreaker report stated that Pershing Square held $2.1 billion notional of all its credit default swaps (which would presumably include its BP CDS). Given that the firm tends to hold a limited number of concentrated positions, a sample notional size of $1 billion would imply potential losses of over $70 million and a sample notional size of $500 million would imply over $35 million in potential losses. These figures are purely hypothetical as it is unknown exactly how big the BP position was/is.

For every loser – a winner

While Pershing Square may (currently) be on the losing end of the BP trade, who has or is on the other winning side? One beneficiary from the British Petroleum credit strengthening could be the 117 Collateralized Synthetic Obligations (CSO’s) previously identified by Moody’s. Another beneficiary could be investors in some of the basis trading opportunities that could have been had during heights of the crisis.

Regardless of its wrong-way bet on BP, its other investments appear to be doing more than just fine with Dealbreaker reporting that the fund was up 15% (12.2% net of fees) in November (part of Q4) and 35.5% (27% net of fees) year-to-date.

That is if Dealbreaker is to be believed. InsiderMonkey later reported that either Pershing Square had to have made what they called another ‘secret’ investment in November or Dealbreaker was duped in its information source. MarketFolly then tried to bridge the gap between the two reports pointing out that InsiderMonkey likely only looked at 13F filings (and missed looking at other related 13G, 13D and Form 4 filings plus any OTC trades that wouldn’t necessarily need to be disclosed – like, CDS).

According to MarketFolly’s analysis, it seems that  GGP only officially (and legally) emerged from bankruptcy on November 9, 2010 (in the fourth quarter of 2010) and the 46 million new shares that Pershing Square owned at a cost of $10 per share are now trading at $16 per share – the likely source for at least some of that gain.

Dealbreaker also reports that Pershing Square is long credit default swaps totaling $2.1 billion in notional value without specifying how much of this CDS is directly tied to BP. Just imagine how much better a performance it could have been without those BP CDS losses.

Credit analysis provided by Zera Eisenberg

Pershing Square

Separately for investors interested in Pershing Square’s other activities:

– The controversial and potential foreclosure of Stuyvesant Town-Peter Cooper Village – the largest real estate transaction in American history came to a peaceful end. Thanks to last minute wheeling and dealing between mezz bond holder PSW (PSW is a joint venture between Pershing Square, with 77.5%, and Winthrop Realty Trust) and senior bond holder CWCapital Asset Management, it seems Bill Ackman decided it was better to get out flat then take the chance to fight it out (for a potential $2 billion) in a longer battle with uncertain outcomes for many stakeholders. In his letter he stated that:

We weighed the relative merits of settling the litigation versus pursuing our claims, and concluded that the return-on-invested-brain-damage calculation weighed strongly in favor of a settlement. We subsequently negotiated the sale of our loans to the first mortgage lender at our partnership’s original purchase price of $45 million (our share was 77.5% of this amount) and we folded the tent. I have learned from prior experience that sometimes the better part of valor in an investment situation is to move on. Onward.

More information on the sale of PSW NYC LLC’s mezzanine Stuy Town loans to Stuy Town’s existing senior loan holder CWCapital Asset Management can be found here.


– BP has also been in the news for its recently announced 60% stake sale of Argentinean energy company, Pan American Energy (PAE) for $7.06 billion to Argentina’s Bridas Corp. which already owned the other 40%. (Bridas is itself now half owned by Chinese energy company, CNOOC which bought the 50% stake in March for $3.1 billion). It is currently said to be trying to sell another $1 billion of North Sea assets and $690 million of Pakistani oil fields.

Prior to this sale, the company already had sales agreements in place totalling $14 billion.  The latest sale brings the cash raised by BP to $21 billion. The earlier sales include:

In July, BP agreed to sell assets in North America and Egypt to Apache Corp. for $7 billion, while in August the company disposed of fields in Colombia to Ecopetrol SA and Talisman Energy Inc. for $1.9 billion. BP has also sold operations in Vietnam and Venezuela to its Russian joint venture partner TNK-BP for $1.8 billion.

The company agreed earlier this month to sell its fuels marketing businesses in Namibia, Botswana and Zambia to Puma Energy, as well as 50 percent interests in BP Malawi and BP Tanzania to a Trafigura Beheer BV unit for $296 million in cash. Last month, BP sold stakes in four Gulf of Mexico deepwater oil and gas fields for $650 million, following the sale of its role as operator of the Tubular Bells fields.

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1 Comment »

Comment by bi
2010-12-09 04:51:27

Why You Could Never Hope To Recreate Bill Ackman’s 15% Return In November

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