Greek Debt Deal Won't Trigger Payouts, for Now

WSJ: Owners of insurance-like contracts designed to protect against potential losses on Greek sovereign debt won't receive payouts, at least for now, even though the country took steps in its restructuring in recent days that could force private creditors to accept losses on the face value of their bonds, a committee of dealers and investors decided.

Thursday's decision marks the first time the panel of experts has held a vote on whether compensation is owed to holders of the credit-default swap protection on Greece.

The 15-member panel, convened by the International Swaps and Derivatives Association, a financial trade group, voted unanimously that a credit event hasn't occurred in relation to two questions submitted anonymously by market participants earlier this week.

The committee noted, however, that the situation with Greece is "still evolving" and that even though it has ruled Greek CDS won't be triggered at this time, there is nothing stopping the same committee from forcing payouts from sellers of Greek CDS at a later date.

CDS, which function like a form of default insurance for corporate and sovereign bonds, can be triggered by a restructuring of the reference debt, a failure to pay interest or principal on the bonds or a bankruptcy, among other things.

The amount of money at stake in Greek credit-default swaps isn't huge. If the swaps are ever triggered, $3.2 billion in net payments could change hands between buyers and sellers of protection against default or restructuring, according to the Depository Trust & Clearing Corp. However, that assumes that all trading parties meet their financial obligations.

Still, the committee's decision could affect investors across other European bond markets and holders of $2.9 trillion of CDS on government debt around the world, because it could signal how the panel might handle similar issues that crop up involving the debt of other troubled countries.

Investors showed little reaction to the ISDA vote. The cost of five-year CDS on Greek bonds was virtually unchanged Thursday, according to data provider Markit.

The first question considered by the ISDA commitee was based on the argument that private-sector creditors may have to take losses in a bond swap with Greece even though the European Central Bank did an exchange where it won't have to suffer losses. That effectively put the ECB above private investors when collecting payments owed, the anonymous submission argued, and constituted a "credit event." The committee unanimously decided that the industry's definitions of subordination hadn't been met.

"It may look and feel a lot like subordination, but apparently the ISDA Determinations Committee felt that the legal facts of the matter were that subordination was not explicitly stated in the documentation and therefore not subordination," said Otis Casey, credit analyst at Markit. "At their base, credit-default swaps are legal contracts."

The second question asked whether a proposed debt exchange with a sufficient number of private creditors that could result in "a reduction in the amount of principal or premium payable" in such a way that would bind all bondholders, including those that didn't agree to the deal, would result in a "restructuring credit event." The ISDA committee ruled this wouldn't trigger CDS payouts.

In mid-January, ISDA said that if Greece inserted so-called "collective-action clauses" retroactively into bonds issued under Greek law in order to be in a position to force holdouts into the restructuring, it "would not, in and of itself, be expected to trigger a credit event." But it added that "the use of such a clause to effect a reduction in coupon or principal" could be enough to trigger CDS because it would make investors suffer losses involuntarily.

Last week, a group negotiating on behalf of private creditors accepted a final offer in the Greek restructuring involving the write-down of 53.5% of their investment, alongside a €130 billion ($173.2 billion) bailout agreement between the Greek government and its official lenders, the European Union and the International Monetary Fund. Individual bondholders must now decide whether to accept the agreement, and the take-up rate so far isn't known.

 

Write to Katy Burne