Altice debt restructuring poses stern test for CDS market
The restructuring of Altice’s €24.1bn debt pile is set to provide the latest test for the US$9trn credit default swap market following months of wrangling over how to ensure a fair payout for protection holders.
Analysts say the outcome of Wednesday’s closely watched Altice CDS auction is in the balance after the beleaguered French telecoms giant included a so-called lockup agreement in its debt restructuring. That clause prevents nearly all of Altice’s bonds from being used in the auction, a dynamic that threatens to skew the results and potentially short-change CDS protection buyers.
The Credit Derivatives Determinations Committee, a panel of banks and investors that rule on CDS market matters, has overseen painstaking preparations to settle the contracts and included a mechanism in the auction designed to address the bond scarcity issue.
Nevertheless, the Altice saga has served as a reminder of how complex CDS can be and why the instruments can’t always be relied upon as a hedging tool. That has raised the stakes for Wednesday’s auction, with cheerleaders for the controversial derivatives hoping that protection holders can secure a fair deal – and so give the wider market a much-needed boost.
“There are not a bunch of bonds available for the auction [because of the lockup agreement],” said one high-yield investor. “I think it is a legitimate worry when you buy [CDS] protection. It generally makes selling protection more attractive, but then it distorts the entire market.”
The CDS committee ruled on June 9 that CDS on Altice’s debt had been triggered after the embattled company announced a restructuring in May that will lower its outstanding debt by €8.6bn to €15.5bn. However, it has taken more than two months and 22 meetings for the committee to arrange what would ordinarily be a routine affair to settle the contracts.
Fair price?
The CDS auction mechanism aims to establish a fair market price for a company’s debt – and therefore the size of the payout needed on CDS contracts to compensate for losses that investors face on their bond holdings. That means any restrictions on the debt available for delivery into the auction risk producing unexpected results that don’t reflect economic reality.
Altice’s February 2027 US dollar bonds were bid at a price of 92 cents on the dollar on Wednesday morning, according to LSEG data, having traded as low as 74 cents last year. That would imply a payout for CDS holders of US$8 for every US$100 of protection they owned. However, the debt lockup covers 95% of Altice’s bonds, according to the committee, sowing doubt over the level of payouts for CDS in what has fast become another test case for the wider market.
“The [Altice] restructuring does appear to be complicating the CDS auction process,” said a second high-yield investor. “When something that complex and noisy happens, we tend not to get involved.”
The CDS committee has looked to introduce different mechanisms to address the lack of available Altice bonds. One was a cash-settlement solution that the committee has since scrapped after Altice announced on August 19 a sooner-than-expected deadline for participating in a debt exchange for its restructuring.
The committee has kept another measure known as the “composite package” for CDS users looking to settle their contracts physically, where they must deliver, or take delivery, of Altice's debt. This will involve the use of assets that Altice bondholders will receive from the company’s debt exchange, which closes on September 9.
The final results of the auction are due to be published at 1500 BST on Wednesday. However, the composite package feature means some transactions may not be settled until after the restructuring is scheduled to take effect on October 1.
Auction anxiety
This isn’t the first time that quirks around the CDS auction process have threatened to undermine the value of the contracts as a hedge. Last September, just one security worth US$22m of principal was used to settle the US$888m outstanding of Avon CDS.
In 2021, CDS contracts on car rental company Europcar proved worthless after banks participating in the auction could not source €7.4m worth of the firm’s bonds.
Such events have coloured investors’ views of the instrument, encouraging many to give it a wide berth.
“If you look at [the] 15-year trend … this issue has come up repeatedly,” said the second high-yield investor. “[Such issues] do put people off and as a consequence single name CDS volumes are lower.”