The Credit Derivatives Determinations Committee has accepted a request to rule whether credit default swaps on Ukraine have triggered in the wake of Kyiv striking a deal with its creditors last week to suspend sovereign debt payments for two years.
The Determinations Committee, a 13-member industry body of banks and investors, will now consider if that agreement constitutes a so-called restructuring credit event that would trigger payouts to CDS protection holders.
War-torn Ukraine won some much-needed breathing space last week when investors agreed to defer payments on nearly US$20bn in face value of foreign currency bonds for 24 months from August 1. Separately, it also got backing to delay payments on its US$3.2bn GDP-linked warrants and lower the amount of GDP-related repayments.
The Determinations Committee will vote on whether a restructuring credit event has occurred for the purposes of CDS. If a supermajority of 80% or more members decides an event has taken place, it will then set the terms of the auction used to determine CDS payouts. That process uses market forces to establish the value of Ukraine’s foreign currency debt, which in turn is used to calculate CDS payouts that aim to compensate for bondholder losses. Ukraine’s 7.75% September 2022 US dollar bonds are currently bid at 33.5% of face value, according to Refinitiv, giving some indication of the value of the CDS protection.
There are about US$221m of Ukraine CDS outstanding to be settled, Reuters reported, citing data from the DTCC.
The question over Ukraine CDS comes at a time when the Determinations Committee continues to explore how best to settle Russia CDS – over two months since those contracts were deemed to have triggered. That process has been complicated by the introduction of international sanctions against Moscow, including US measures banning US firms from buying Russian securities.
The Determinations Committee now appears closer to moving ahead with an auction, after securing a temporary waiver from the US Treasury’s Office of Foreign Assets Control to allow trading of Russian bonds for 10 business days around a CDS auction to allow settlement of these contracts. But experts say there is still no guarantee the auction will function properly.