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Monday, 11 December 2017

ISDA to consider Novo Banco CDS trigger

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ISDA’s Credit Determinations Committee will convene at 1200 GMT on Wednesday to determine whether the transfer of almost €2bn in nominal senior debt from Portugal’s Novo Banco into bad bank Banco Espirito Santo constitutes a credit event.

A ruling in favour of such an event would trigger payouts on US$432m net notional in credit default swaps referencing Banco Novo.

The question posed to the DC on December 30 by an anonymous holder of credit protection, references Governmental Intervention – a new type of credit event included in the 2014 CDS definitions.

The DC yesterday rejected similar calls to determine whether a Restructuring Credit Event had occurred with respect to Novo Banco.

On December 29, the Bank of Portugal ruled that five series of senior bonds with total notional of €1.985bn would be transferred from Novo Banco to BES to address a €1.4bn shortfall at the “good” bank.

As a result of the transfer, the affected notes whose maturities range from 2016 to 2024 lost 90% of their value in secondary market trading.

Governmental Intervention was added to revised CDS definitions in an attempt to capture government bailout of banks. It responded to concerns that the 2003 definitions could be flawed after some restructurings, most notably for Dutch Bank SNS Reaal, were seen as engineered to avoid triggering credit events.

According to the CDS definitions, a Governmental Intervention credit event occurs when government enforced action directly or indirectly applied to the reference entity affects creditors’ rights either through a reduction in interest payable, a reduction in principal at redemption, postponement or deferral of payments or a change in payment priorities causing subordination.

Such a credit event would also be called where there is a transfer that changes the beneficial holder of the obligation or a mandatory cancellation or exchange.

 

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