Investor battle over Ardagh CDS heats up
A battle is heating up over how to settle credit default swap contracts on Ireland’s Ardagh Packaging Finance following legal arguments from three investment managers over which bonds should be used to determine payouts to protection holders.
Tresidor Investment Management and Laurion Capital Management have rejected a challenge from Arini Capital Management over the list of bonds that can be used in a forthcoming Ardagh CDS auction, according to submissions published on Monday by the Credit Derivatives Determinations Committee, the panel of banks and investors that rule on matters in the US$11trn CDS market.
Bonds included in a CDS auction are used to calculate the payouts that protection holders will receive. Arini, which was founded by former Credit Suisse star trader Hamza Lemssouguer, argued in a December 30 submission that three of Ardagh’s senior unsecured bonds should be excluded from the auction because they had no outstanding principal when the company's CDS were judged to have been triggered in early October.
Whether Arini’s argument prevails will have major implications for Ardagh CDS holders. Unsecured bonds tend to trade at a lower value than secured debt. That means including Ardagh's unsecured bonds in the auction should increase the chances of CDS protection holders receiving a higher payout.
Ardagh’s secured notes maturing in 2030 trade at 92% of face value, according to LSEG data. That suggests CDS holders would receive a payout of US$8 for every US$100 of protection they bought. LSEG data show no observable market prices for Ardagh’s unsecured notes, which were exchanged for equity as part of the company’s debt restructuring that completed in November.
Both Laurion and Tresidor rejected Arini’s assertions that the unsecured debt should be excluded from the CDS auction. London-based credit specialist Tresidor said Arini’s challenge contains “multiple logical non-sequiturs and quotes selectively” from a decision from an external review panel of senior lawyers, which ruled in December that Ardagh CDS had been triggered, to justify the exclusion of the unsecured bonds.
“None of the grounds outlined in the challenge provide a valid reason for withdrawing the [bonds] from the [auction],” Tresidor’s submission stated. Tresidor is led by Michael Phelps, a former BlackRock, Lehman Brothers and JP Morgan credit specialist, and Edgar Senior, who worked in credit derivatives roles at JP Morgan and Goldman Sachs earlier in his career.
New York-based Laurion Capital's submission, through law firm Milbank, called Arini’s interpretation of parts of the legal framework underpinning the CDS market “incorrect and unworkably muddy” and labelled Arini’s policy arguments for not including the bonds as “misguided”.
It also noted that securities that are set to be converted into equity have been included in CDS auctions before.
Ben Smith and Sheehan Maduraperuma founded Laurion Capital in 2005 having previously run a proprietary trading team at JP Morgan.
The Determinations Committee is scheduled to meet on Wednesday to discuss the latest twist in this protracted and controversial saga. The panel has already convened 27 times since first agreeing to consider whether Ardagh CDS had been triggered in early October.
That resulted in an inconclusive decision later that month as only four members of the Determinations Committee voted in favour of a CDS trigger while seven voted against. The decision was subsequently referred to an external review panel – a rare occurrence in a market where most decisions are unanimous. That panel of three senior lawyers ruled in December that Ardagh CDS had in fact been triggered.
Arini, Laurion and Tresidor have been contacted for comment.