CDS Panel Rules Credit Suisse Takeover Not A Bankruptcy Event
The nature of Credit Suisse’s takeover has attracted controversy, particularly in regard to the treatment of the AT1 securities.
(Bloomberg) -- A panel overseeing the credit-default swap market has ruled that the government-brokered takeover of Credit Suisse Group AG didn’t constitute a bankruptcy event in which an insurance payout could be triggered.
The Credit Derivatives Determinations Committee said the fire sale of Credit Suisse to UBS Group AG was not a bankruptcy credit event, according to a notice on its website. The question to the panel had related to both senior and subordinated Credit Suisse Group swaps.
Hedge funds had been buying up the default protection in recent weeks, with traders scrutinizing the contracts’ documentation for grounds for a potential payout. It’s the second time in recent days that the committee has ruled against the prospect of a payout in response to questions posed by market participants.
The latest query to the CDDC focused on whether the crisis of confidence in Credit Suisse equated to a bankruptcy scenario, as per the terms detailed in the credit default swaps rulebook written by the International Swaps and Derivatives Association. This is despite Credit Suisse not having entered insolvency proceedings anywhere in the world.
The committee last week ruled against a payout query related to the write-down of Credit Suisse’s Additional Tier 1 securities during the March takeover of the lender by UBS Group AG, saying that a so-called governmental intervention credit event hadn’t occurred. The panel took the view the bonds were too junior in the capital structure to trigger swaps related to the subordinated debt.
The main difference between the two questions is that a bankruptcy credit event relates to the issuer’s finances, while a governmental intervention credit event happens when the intervention by the state leads to a reduction in the interest or the principal of the bonds underlying the swaps.
The nature of Credit Suisse’s takeover has attracted controversy, particularly in regard to the treatment of the AT1 securities which were written down even as shareholders retained some value. Bondholders are challenging the decision, with a Swiss court recently ordering financial regulator Finma to release the decree that allowed for the decision.
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