Thomson undergoes second credit event
Author: Mark Pengelly
Source: Risk magazine | 02 Dec 2009
Categories: Credit Derivatives
The International Swaps and Derivatives Association's Europe, Middle East and Africa credit derivatives determinations committee has decided by vote that a bankruptcy credit event has occurred on Paris-based media company Thomson, just over a month after auctions were held to settle an earlier restructuring credit event on the firm.
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Thomson said it had requested and obtained the opening of a 'sauveguarde' proceeding in a French court on November 30, which is similar to Chapter 11 bankruptcy protection in the US. The next day, the Isda committee decided the bankruptcy credit event had occurred. A date for the auction, along with a list of deliverable obligations, has yet to be finalised.
The event follows a restructuring credit event on Thomson on July 27. Billed as the first real test of the small bang protocol, three auctions were eventually held on different maturities of the firm's debt on October 22. However, the auctions were beset by difficulties, while the recovery rate on the shortest-dated debt was skewed by technical factors. The price of the two-and-a-half-year maturity bucket fixed at an unexpectedly high 96.25%.
Restructuring credit events do not automatically trigger contracts and instead give buyers and sellers the option to trigger. Analysts note recovery rates on Thomson may fix at lower levels during the forthcoming auction, meaning buyers of protection would have been well advised not to have triggered their contracts the first time around. Credit default swap (CDS) protection buyers receive the par value of defaulted debt, minus the recovery rate.
Dealers, meanwhile, are unlikely to relish the prospect of another auction on Thomson. The company was a widely traded CDS reference entity and featured in many of the off-the-run Markit iTraxx credit derivatives indexes – including series 1-7 of the iTraxx Europe credit derivatives index, series 4-7 of the iTraxx Europe HiVol index and series 8-11 of the iTraxx Europe Crossover index. It was also heavily referenced in the structured credit market, ranking as the fourth most popular component of corporate synthetic CDOs in the US, according to a study by New York-based Standard & Poor's in December 2008.
However, €1.1 billion of the company's €2.839 billion in debt was privately placed, leading to confusion among trading desks and the organisers of the previous cash-settlement auction. A final list of deliverable obligations for the auctions was not published until almost eight weeks after the triggering of the restructuring credit event. Also, with no idea of where the company's bonds were trading, market participants were unable to determine potential recovery rates.
In addition to other operational pitfalls, the problems have led dealers to consider fresh changes to the CDS market. But with dealers distracted by operational deadlines, sources say no discussions are likely until 2010.
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