Speculators including Sona Asset Management and XAIA Investment GmbH stand to earn as much as US$250 million from the bankruptcy.
They invested in derivatives that pay out when a company defaults. The fate of those securities was at the heart of the battle over whether Thomas Cook lived or died.
Thomas Cook will be the latest of several big payouts this year for hedge funds and traders who bought the credit-default swaps.
The list includes UK fashion retailer New Look and Rallye, parent of French supermarket chain Casino Guichard-Perrachon.
More are set to follow as Europe’s economy slows and a growing number of companies come under stress.
A panel of traders called the EMEA Determinations Committee ruled on Monday evening that Thomas Cook triggered a bankruptcy credit event when it filed for compulsory liquidation earlier in the day.
Separately, it ruled that the company’s decision to file for Chapter 15 bankruptcy in the US last week was also sufficient for payment, but only for CDS contracts that fall under 2003 definitions.
That means some investors with contracts that expired last week could still get paid.
CDS are a popular way for hedge funds to bet on companies facing difficulties with their balance sheets. They don’t always pay out in the event of default, however.
Thomas Cook’s rescue could have rendered CDS on the debt worthless and investors including Sona had threatened to block it.
Holders of CDS were concerned about a technicality related to plans to convert Thomas Cook debt into shares, leaving the CDS with nothing to insure.
“It’s certainly a relief for the hedge funds that Thomas Cook has filed and they haven’t had to push the company into administration,” said Marc Pierron, a senior credit analyst at Spread Research in Lyon.
If rescue talks hadn’t collapsed over the weekend and the hedge funds had undermined them to ensure a payout, it would have added to criticism of the CDS market.
Regulators are already eyeing the derivatives market for so-called manufactured credit events, when funds entice companies to miss bond payments they could otherwise make.