NON existent debt

Here’s a breakdown of the tactics used by hedge funds in Europe’s market for “non-existent debt” (ie. debt that is being traded before it’s formally issued or fully settled) and how they’re shaping risk and opportunities. The main story centred on Ardagh Group S.A.’s restructuring, but the mechanics reflect broader trends.
Financial Times

What’s going on?

In Europe we’re seeing an increasing market for “when-issued” bonds or debt instruments before they officially exist (or are finalised). In the Ardagh case, hundreds of millions of dollars of hypothetical bonds were traded (at up to 110 cents on the dollar) on the expectation of a post-restructuring debt instrument.
Financial Times

Hedge funds and other credit investors are positioning early, negotiating restructuring, swaps or new debt issues for distressed / highly levered companies, and then trading the paper either before the formal issuance or with full knowledge that terms may still shift.

Key tactics used by hedge funds

Here are the major tools and tactics they’re applying:

Positioning early in restructurings

Hedge funds acquire the “fulcrum” debt (i.e., the security that’s likely to be converted or reorganised) or negotiate side deals so they end up with favourable conversion/equity or new debt terms.

Then they trade secondary instruments (or the “promised new debt”) before full legal issuance — betting the deal goes through. Ardagh’s case: investors bought the new debt ahead of issuance, based on expectation of ~9.5% yield for the restructured company.
Financial Times

“When-issued” / pre-issuance trading

This is literally trading “debt that doesn’t yet exist” — either because it’s contingent on a restructuring, court approval, or issuance event.

Because the issuance is expected but not yet final, there is risk (if the deal fails, you may have to unwind). The premium (e.g., paying >100 cents) reflects that risk + expected yield. Ardagh story: “if for any reason the transaction does not go through, all pre-emptive trades must be reversed”.
Financial Times

Relative-value / arbitrage around supply events

In the more “normal” sovereign / bond markets, hedge funds have been exploiting patterns (e.g., auction supply, dealer balance sheet constraints) to front-run or trade around issuance. For example: hedge funds offload bonds ahead of auctions, then buy at issuance when price is depressed, then sell after.

In the distressed corporate debt context, this mixes into trading the anticipated new bonds, swaps, or debt-for-equity steps.

High leverage, concentrated trades & structural arbitrage

Hedge funds often borrow heavily (use repo, derivatives, swaps) to amplify returns. Some of that leverage is used to take speculative positions on issuance, restructuring outcomes, or supply shocks.

Because the instrument being traded may not yet formally exist, the risk/reward is asymmetrical: large potential gains if the deal succeeds, large risk if not.

Negotiation / control stakes via distressed debt

By acquiring enough of the debt (or being active creditors), hedge funds can influence restructuring terms (debt-for-equity swaps, new securities issues) and thereby position themselves to profit on the upside of the new capital structure. Ardagh: bondholders would gain control, old bonds partly written off, etc.

This means they’re not just passive traders — they become “active” in restructuring.

Why is this happening now (and in Europe)?

Many European companies are dealing with high leverage (built up in low interest rate era) and now facing higher rates, inflation, etc., so restructurings are more frequent. Ardagh is one example.

Issuance of new debt (including refinancing) is large as companies or governments need to raise more. Hedge funds spot the “deal flow”.

Dealers / banks have limited balance sheet capacity (post-2008 regulation) which means hedge funds fill gaps in issuance/distribution.
The Financial Express

Electronic trading, more transparency, faster flows, make pre-issuance trading more accessible.

In distressed situations, terms are often negotiated and uncertain, which gives potential for outsized returns to those willing to accept risk (of deal failure) or structure complexity.

Risks and concerns

Deal failure risk: if the anticipated restructuring or issuance doesn’t occur (or terms are much worse), those who bought “pre-issuance” bonds may face big losses (and unwind trades). In Ardagh’s case: if the transaction fails, pre-emptive trades must be reversed.

Liquidity risk / leverage risk: Because many of these trades are leveraged, a small shift (e.g., a change in restructuring outcome, legal challenge) could trigger margin calls, fire sales, amplify market stress. European regulators highlight that hedge funds’ leverage and trading volumes pose indirect risks to financial stability.

Opacity / uncertainty of pricing: For non-existent debt (pre-issuance), pricing is speculative. That could lead to mispricing, large mark-to-market swings.

Systemic risk: If many funds are engaged in similar trades and many deals fail (or issuance dries up), simultaneous unwind could destabilise credit markets.

Moral/hazard/negotiation distortions: Some question whether hedge funds negotiating restructurings (with strong influence) may impose terms that are overly favourable to them and perhaps disadvantage other stakeholders (e.g., employees, existing bondholders).

Why this is notable for “non-existent debt” specifically

The term emphasises that the traded instrument is not yet formally in place (issuance, restructuring approval pending).

Hedge funds are essentially betting on future issuance or restructuring outcomes rather than strictly existing, liquid instruments.

Because they trade ahead of formal existence, they can capture a premium if outcome is positive, or suffer large losses if outcome is negative — the “event-driven” nature is heightened.

The premium paid (e.g., >100 cents for future bonds) shows how the expectations of yield and company improvement drive this market. (In Ardagh: investors already paid >100 cents for bonds yielding ~9.5% expected in the restructured entity.

Implications

For investors and companies: The presence of this speculative market may help companies restructure or issue new debt (as there’s demand), but may also raise cost of borrowing (if speculative demand drives up prices/yields).

For regulators: They need to watch that these markets don’t amplify vulnerabilities — e.g., due to leverage, exit risk, concentration of players.

For broader credit markets: If many pre-issuance trades unwind, could cause ripple effects into the secondary market, credit spreads, and refinancing conditions.

For hedge funds: Opportunity for outsized returns, but also significant deal-specific and execution risk.