August 6, 2014 / 2:11 PM / 3 years ago

No CDS trigger for BES, succession event likely

LONDON, Aug 6 (IFR) - No bankruptcy credit event has occurred with respect to Banco Espirito Santo, the ISDA Determinations Committee has ruled, removing the possibility of junior bondholders that had bought CDS protection on the ailing lender from receiving any compensation for their losses.

Experts predicted the bankruptcy question was likely to be dismissed, suggesting the DC meeting was a mere formality to clarify the outcome for CDS holders. The DC decision, which was taken by 10 sellside and 15 buyside firms, was unanimous.

Meanwhile, the DC is still deliberating whether a succession event has occurred with respect to BES, which would transfer US$900m of CDS referencing BES to Novo Banco. All 15 DC members voted in favour of postponing the succession event decision, which would otherwise have had to be made by 5pm on Thursday.

The DC agreed to meet again to discuss the matter on Friday August 8 at 12pm BST “to allow time to seek further information regarding the percentage of relevant obligations transferred” to the new entity.

Credit practitioners widely expect a succession event on CDS referencing BES following a 4.9bn capital injection, which saw the lender split into a newly-created good bank, Novo Banco, and bad bank. The senior debt will remain intact and be transferred to the healthy institution. Junior bondholders are set to be wiped out completely.

Credit strategists at BNP Paribas noted that 16% of senior unsecured bonds would need to stay at BES rather than be transferred to Novo Banco in order for the criteria for a succession event not to be met. Under the ISDA rules, 75% of the obligations need to be moved to a new entity for all of the CDS to be transferred to that same firm.

“The DC would need to form a view on the portion of senior unsecured bonds that stay - if any. That said, we expect the 75% threshold to be met,” the strategists wrote in a report published today.

A flaw in the current CDS contract, which does not cover bank bail-in, means junior bondholders that had bought CDS protection are set to lose out. A new CDS contract will be rolled out in September, which aims to fix glitches in the current version. (Reporting By Christopher Whittall, editing by Helen Bartholomew)

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below