August 5, 2014 / 4:07 PM / 3 years ago

Decision on BES CDS delayed

LONDON, Aug 5 (IFR) - The ISDA Determinations Committee has postponed its decision over whether a succession event has occurred with respect to Banco Espirito Santo, which would transfer US$900m of CDS from the ailing lender to Novo Banco.

A statement on the ISDA website confirmed the DC met today to discuss the succession event question and resolved to meet again tomorrow to continue discussions “in order to allow more time to collate information concerning this event”.

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.

Such an eventuality would in effect rule out the possibility of CDS on BES triggering, which would leave protection holders empty-handed despite junior bonds getting completely wiped out.

The DC has until 5pm on Thursday to resolve the question, unless an extension to the deadline is agreed by a supermajority (80%) of voting firms. Otherwise the question is referred to an external arbitration panel for review.

The DC is already scheduled to convene tomorrow at 12pm London time to discuss a separate question as to whether there has been a bankruptcy credit event with respect to BES. However, experts believe this is likely to be dismissed and suggest the meeting is a mere formality to clarify the outcome for CDS holders.

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 Luzette Strauss)

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