ISDA—the organisation that determines when a credit event has occurred—announced this morning that a credit event had not yet occurred to trigger payouts on $3.25 billion in Greek credit default swaps.However, that does not mean that a credit event may not be triggered in the future.
Two questions were asked of the committee: first, if making the European Central Bank a preferred debt-holder by not including it in the debt restructuring constituted a credit event, and second, if the retroactive inclusion of a collective action clause (CAC) in the terms of Greek bonds had triggered a credit event.
ISDA responded that the “specific fact pattern” presented by the first question would not constitute “subordination” under its rules. In the immediate wake of the announcement, analysts speculated that a better question could induce the committee to say “yes” on this one.
And while ISDA says it can never make rulings without the full details at hand, it had indicated previously that the mere inclusion of a CAC in the text of a bond agreement would not necessarily trigger a credit event. On the other hand, activation of the CAC—in this case, forcing all bondholders to participate in a debt swap with the approval of a quorum of bondholders (one third or one quarter, depending on the specific bond)—might still trigger CDS payouts.
Greece voted last week to include a CAC in its bond issuances. We’ll know whether or not the country will choose to activate it once it determines the level of voluntary participation it would receive in a bond swap. Activation of the clause is only likely to occur if 75 to 90 per cent of bondholders participate in the deal.
Read the full statement from ISDA below:
EMEA Determinations Committee Statement March 1, 2012
In light of today’s EMEA Determinations Committee (EMEA DC) unanimous decisions in respect of the two potential Credit Event questions relating to the Hellenic Republic (DC Issue 2012022401 and DC issue 2012022901), the EMEA DC has agreed to publish the following statement:
The first submitted question (DC Issue 2012022401) asked whether the holders of Greek law bonds had been subordinated to the ECB and certain NCBs whose bonds were acquired by the Hellenic Republic prior to the implementation of new Greek legislation such that such subordination constitutes a Restructuring Credit Event. (The full text of the question is available here http://www.isda.org/dc/view.asp?issuenum=2012022401.)
The EMEA DC unanimously determined that the specific fact pattern referred to in the first submitted question does not satisfy either limb of the definition of Subordination as set out in the ISDA 2003 Credit Derivatives Definitions (the 2003 Definitions) and therefore a Restructuring Credit Event has not occurred under Section 4.7(a) of the 2003 Definitions.
The second submitted question (DC Issue 2012022901) asked whether there had been any agreement between the Hellenic Republic and the holders of private Greek debt which constitutes a Restructuring Credit Event. (The full text of the question is available here http://www.isda.org/dc/view.asp?issuenum=2012022901.)
The EMEA DC determined that it had not received any evidence of an agreement which meets the requirements of Section 4.7(a) of the 2003 Definitions and therefore based on the facts available to it, the EMEA DC unanimously determined that a Restructuring Credit Event has not occurred under Section 4.7(a) of the 2003 Definitions.
The EMEA DC noted, however, that the situation in the Hellenic Republic is still evolving and today’s EMEA DC decisions do not affect the right or ability of market participants to submit further questions to the EMEA DC relating to the Hellenic Republic nor is it an expression of the EMEA DC’s view as to whether a Credit Event could occur at a later date, in each case, as further facts come to light.