The DC had already decided on Wednesday that no bankruptcy event had occurred with respect to BES CDS, removing the possibility of junior bondholders that had bought protection from receiving any compensation for their losses.
The decision over the succession event had already been delayed in order to allow the DC to seek further information regarding the amount of bonds transferred to the new entity – a threshold of 75% had to be met in order for the event to be called. In the end, the DC decision was unanimous and confirms the worst for protection holders.
Credit practitioners widely expected a succession event following a €4.9bn capital injection for BES, which saw the lender split into a newly-created good bank, Novo Banco, and bad bank. This involved the senior debt remaining intact and being transferred to the healthy institution. Junior bondholders are set to be wiped out completely.
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.