Bonds People & Markets

CDS market passes Altice debt test

 |  IFR 2598 - 30 Aug 2025 - 5 Sep 2025  | 

The US$9trn credit default swap market passed its latest test on Wednesday after an auction to settle CDS on Altice France determined that protection holders would receive enough compensation to cover expected losses on bonds belonging to the beleaguered telecoms giant.

The final Altice CDS auction price was set at 87.75, meaning that CDS holders would receive US$12.25 for every US$100 of protection they owned – an outcome that broadly matched market expectations. Bank traders had on average quoted Altice debt earlier in the day at a price of 86.25 following strong demand to buy the company's bonds in the second round of the auction.

The results will come as a relief to the Credit Derivatives Determinations Committee, the panel of banks and investors that rule on CDS market matters, which oversaw painstaking preparations for Wednesday’s auction amid widespread concerns that a so-called lockup agreement in Altice’s mammoth €24.1bn debt restructuring could torpedo proceedings.

The lockup agreement covered 95% of Altice's senior bonds – an unusually high share designed to smooth the restructuring process as the French telecoms company sought to lower its outstanding debt by €8.6bn to €15.5bn. 

That clause threatened to restrict the amount of Altice’s bonds that could be used in the auction, which risked skewing results and short-changing CDS protection buyers. There was US$232m in net notional of Altice France CDS spread across 1,318 contracts as of August 22, according to the Depository Trust and Clearing Corp.

"There have been many cases of bonds being locked up without it fully disrupting the auction process, but it’s pretty uncommon for such a high percentage of bonds to be locked up," said John Williams, head of derivatives practice at law firm Milbank. “[The committee was trying] to make sure that people don’t have to worry about problematic trade settlement within the auction.”

All locked up

It took the CDS committee more than two months and 22 meetings to arrange what would ordinarily be a routine affair to settle the contracts. CDS auctions are designed 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. Any restrictions on the debt available for delivery into an auction therefore risks producing unexpected results that don’t reflect economic reality.

In the end, the CDS committee decided to include a mechanism in the Altice auction designed to address the bond scarcity issue for CDS holders that wanted to settle their contracts physically. Physical settlement involves delivering, or taking delivery, of a company’s bonds. The measure, known as the “composite package”, involved the use of assets that Altice bondholders will receive from the company’s forthcoming debt exchange for its restructuring, which closes on September 9.

"While lockup agreements include a marketmaker exception, most of them don’t include wording or language that really allows participating bidders in an auction to get comfortable," said Fred Quenzer, senior counsel at the International Swaps and Derivatives Association.

"Ultimately, you don’t want to disincentivise people from participating in the auction because they can’t accept locked-up debt for whatever reason.”

There was a net €38m of requests to sell Altice bonds in the auction to settle CDS contracts physically. These requests are filled by limit orders placed through dealing banks in the second round of the CDS auction. The price at which the orders are filled becomes the final auction price. In this case, all of the €38m of net sell orders were filled at the highest limit order price of 87.75, which was placed via Goldman Sachs.

It is not clear from the auction results whether the composite package of assets from Altice’s forthcoming debt exchange will be used to meet any of the requests for physical CDS settlement. Altice’s restructuring is scheduled to take effect from October 1, meaning any CDS trades involving the composite package won’t settle until after that time.

High-profile test

The complications over Altice’s debt lockup had made Wednesday’s auction the latest in a series of high-profile tests for the CDS market, as quirks around the CDS auction process have repeatedly 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. The Altice saga may do little to alleviate those concerns among sceptics despite the auction delivering what appears to be a fair outcome for CDS holders.

“CDS is becoming more and more complicated and not something for us long-only investors any more,” said one high-yield investor. “CDS may become more a tool for smaller groups that truly understand the tool and have resources to study every single CDS contract, fully understanding the consequences.”

Additional reporting by Jane Li