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Credit event

Credit event

Definition of credit event

What is a credit event?

A credit event is a sudden, tangible (negative) change in a borrower’s ability to meet their payment obligations, which triggers a settlement under a credit default swap (CDS). A CDS is a credit derivative investment product with a contract between two parties. In a credit default swap, the buyer makes periodic payments to a seller to protect against credit events such as default. In this case, the default is the event that would trigger the unwinding of the CDS contract.

You can think of a CDS as insurance to protect the buyer by transferring the risk of a credit event to a third party. Credit default swaps are unregulated and are sold through brokerage arrangements.

Since the 2008 credit crisis, there has been a lot of talk about overhauling and regulating the CDS market. It could finally happen with the Changes proposed by ISDA in 2019 to its 2014 Definitions of Credit Derivatives, which address issues relating to “closely matched credit events”.

Types of credit events

The three most common credit events, as defined by the International Swaps and Derivatives Association (ISDA), are 1) bankruptcy, 2) default, and 3) debt restructuring. Less common credit events are breach of obligation, acceleration of obligation, and repudiation / moratorium.

  1. Bankruptcy is a legal process and refers to the inability of an individual or organization to repay its unpaid debts. Usually, the debtor (or, more rarely, the creditor) files for bankruptcy. A bankrupt business is also insolvent.
  2. Default is a specific event and refers to the inability of an individual or organization to pay debts on a timely basis. Continued defaults could be a precursor to bankruptcy. Default of payment and bankruptcy are often confused: bankruptcy tells your creditors that you will not be able to pay them in full; a default tells your creditors that you will not be able to pay when due.
  3. Debt restructuring refers to a change in the terms of the debt, which makes the debt less favorable to the debt holders. Common examples of debt restructuring include a decrease in the principal amount payable, a decrease in the coupon rate, a postponement of payment obligations, a longer maturity or a change in the priority ranking of payments.

Understanding Credit Events and Credit Default Swaps

A credit default swap is a transaction in which one party, the “protection buyer”, pays the other party, the “protection seller”, a series of payments over the term of the agreement. Essentially, the buyer takes out some form of insurance against the possibility that a debtor will experience a credit event that would jeopardize their ability to meet their payment obligations.

Although CDS looks like insurance, they are not a type of insurance. On the contrary, they are more like options because they bet on whether or not a credit event will occur. In addition, CDS do not have the underwriting and actuarial analysis of a typical insurance product; rather, they are based on the financial strength of the entity issuing the underlying asset (loan or bond).

Buying a CDS can be a hedge if the buyer is exposed to the borrower’s underlying debt; but because CDS contracts are traded, a third party could bet that

  1. the chances of a credit event would increase, in which case the value of the CDS would increase; or
  2. a credit event will indeed occur which would lead to a profitable cash settlement.

If no credit event occurs during the term of the contract, the seller who receives the buyer’s premium payments would not need to settle the contract and would instead benefit from the receipt of the premiums.

Key points to remember

  • A credit event is a negative change in a borrower’s ability to meet their payments, which triggers the settlement of a credit default swap.
  • The three most common credit events are 1) bankruptcy, 2) default, and 3) debt restructuring.

Credit Default Swaps: A Brief History

1980s

In the 1980s, the need for more liquid, flexible and sophisticated risk management products for creditors laid the groundwork for the eventual emergence of credit default swaps.

Mid to late 90s

In 1994, investment banking firm JPMorgan Chase (NYSE: JPM) created the credit default swap as a means of shifting credit exposure for commercial loans and freeing up regulatory capital in commercial banks. By entering into a CDS contract, a commercial bank transferred the risk of default to a third party; the risk was not taken into account in the banks’ regulatory capital requirements.

In the late 1990s, CDSs began to be sold against corporate and municipal bonds.

The early 2000s

In 2000, the CDS market was around $ 900 billion and functioning reliably, including, for example, CDS payments tied to some of the Enron and Worldcom bonds. There were a limited number of parties to early CDS transactions, so these investors knew each other well and understood the terms of the CDS product. In addition, in most cases the buyer of protection also held the underlying credit asset.

In the mid-2000s, the CDS market evolved in three significant ways:

  1. Many new parties have become involved in CDS trading through a secondary market for both sellers and buyers of protection. Due to the large number of players in the CDS market, it was hard enough to keep track of the actual owners of the protection, let alone those who were financially strong.
  2. CDSs have started to be issued for structured investment vehicles (SIVs), for example, asset-backed securities (ABS), mortgage-backed securities (MBS) and secured debt securities (CDOs) ; and those investments no longer had a known entity to track in determining the strength of a particular underlying asset.
  3. Speculation became widespread in the market, so that sellers and buyers of CDSs no longer owned the underlying asset, but simply wagered on the possibility of a credit event of a specific asset. .

The role of credit events during the 2007-2008 financial crisis

Arguably, between 2000 and 2007 – when the CDS market rose 10,000% – credit default swaps were the fastest adopted investment product in history.

At the end of 2007, the CDS market had a notional value of $ 45 trillion, but the corporate bond, municipal bond and SIV market totaled less than $ 25 trillion. Therefore, a minimum of $ 20 trillion was comprised of speculative bets on the possibility of a credit event occurring on a specific asset not owned by either party to the CDS contract. In fact, some CDS contracts have been made by 10 to 12 different parties.

With CDS investments, risk is not eliminated; instead, it is transferred to the CDS seller. The risk then is that the CDS seller will experience a credit default event at the same time as the CDS borrower. This was one of the main causes of the 2008 credit crunch: CDS vendors like Lehman Brothers, Bear Stearns and AIG all defaulted on their CDS bonds.

Finally, a credit event that triggers the initial CDS payment may not trigger a downstream payment. For example, professional services firm AON PLC (NYSE: AON) entered into a CDS as a seller of protection. AON sold its stake to another company. The underlying bond defaulted and AON paid the $ 10 million owed due to the default.

AON then sought to recover the $ 10 million from the downstream buyer, but was unsuccessful in the dispute. Thus, AON was stuck with the loss of $ 10 million even though he had sold the protection to another party. The legal problem was that the downstream contract to resell the protection did not exactly match the terms of the original CDS contract.


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Credit event

A “credit event” looms – NationNews Barbados – nationnews.com

Posted on

Looking back, Dr. DeLisle Worrell might have known what was going to happen and wanted to have his take on the matter.

The last paragraphs of the bank’s short, blunt review of the performance of Barbados’ economy in 2016 ended with a recitation of a few principles from seemingly bland textbooks for some reason, how obvious they are and all.

I think maybe that was how the soon-to-be-fired governor let us know he was finally drawing his line in the sand.

People like me once felt it was way too late in the day – after all, hadn’t the good doctor been welcoming the government for years, racking up a national debt everyone said was too big?

When the rift between the finance minister and the governor of the central bank finally arrived, it sent massive shockwaves throughout the financial community here and elsewhere.

Ezra Fieser, who is Bloomberg Caribbean reporter wrote on March 9 that “Moody’s downgrade follows a March 3 cut in S&P and the Feb. 24 sacking of Central Bank Governor DeLisle Worrell, who threatened to stop funding spending. of the government “.

He quoted Royal Bank of Canada economist Marla Dukharan as saying that “the governor who was sacked would have rocked investors just because it shows some kind of instability in policy making. The governor had started to say how bad it really was ”.

Which reminds me to quote a few of Worrell’s officially approved last words:

“The fact that the government spends more on the current account than it receives on taxes and other current revenue is the reason for the increase in central bank lending to the government. It is generally accepted that any additional financing by the Central Bank should be avoided.

… The government’s dependence on the Central Bank to finance its deficit limits the ability of the bank to influence interest rates appropriate to the situation in Barbados, as is standard practice used by central banks all over. (Press release Dec. 2016, published end of Jan. 2017)

There may be other reasons the governor lost his job, but to the extent that he may have stood up and said, “We have to stop this madness” – and that taking this post so late in the day? his tenure may have helped seal his fate. – gives it the ironic twist you only find in the best soap operas.

You look around and realize that those who really caused the economic disaster we are facing are still in power. And still in denial.

The embarrassing comments about the degradation of S&P attributed to Prime Minister Freundel Stuart are not worth reprinting because they only show one person incapable of grasping the leadership role that history asks him to play. Instead of moving forward with the reforms that his party – and himself – ardently championed shortly after the start of his second term, he began to slow down.

Stuart took a full year from showing his usual minimal interest in the issues facing an economically unhealthy 50-year-old nation to focus almost entirely on the festive aspects of this wonderful achievement.

The only funny thing about Stuart’s inappropriate nationalist response to S&P’s latest downgrade is that as soon as he was done, an even more damning report from Moody’s arrived. It was a double whammy.

In fact, the government wanted the whole country to join in the festivities and forget about our economic problems, hoping that by then Independence Day had luckily come and gone, the foreign investment would have been in the kitty and saved every other day to come.

Do not believe me ? What do you say about that: “We have no doubt that we can and will develop our economy further and faster… once we have triggered
$ 1 billion in foreign direct investment that we have ahead of us with projects like the Sandals Casuarina expansion that has started, the Sam Lords redevelopment project that has also started, the Hyatt Centric and even the much-maligned Four Seasons Project which, God willing, can get started shortly.

The speaker? Finance Minister Chris Sinckler in last August’s budget speech.

In fact, he said, the money from the sale of the Barbados National Terminal Company, the first payment from the sale of the Four Seasons project, as well as the first transfer from the China Exim Bank for the Sam Lord redevelopment. would “all be carried out in the next four to six weeks to inject $ 350 million into central bank reserves.” That is to say in mid-October.

As far as I know, none of this has happened yet, except for the refurbishment of the Sandals Casuarina. And so, having recorded deficits since fiscal year 2012-2013 of more than eight percent per year, in that speech the finance minister said he expected the announced measures would reduce the deficit by compared to the 7.9 percent shown in the current fiscal year budget. ending at 5.8 percent.

Did this really happen?

Well, the estimates won’t be released until the day this article is published, so I can’t tell you at this time. But on top of that, the government has said it expects the deficit for the coming year to be less than five percent.

So I would expect all of the usual punches and bravado associated with the current government’s budget speeches and estimates, but it won’t matter.

We’ve reached the point where, unless a really serious overhaul of the economy is undertaken, Moody’s dreadful prediction may unfortunately be the only projection worth reading.

Moody’s said that despite the government’s efforts, the budget deficit remains large and credit risks have increased in Barbados. The debt burden would continue to increase over the next few years, he said, and pressures on domestic and external liquidity have increased. He added: “We rate the likelihood of a short-term credit event as very high, given the lack of fiscal adjustment and increasingly limited financing options.”

And what is a credit event? Well, according to investopedia.com, a “credit event” is a sudden change in a borrower’s creditworthiness that “calls into question the borrower’s ability to repay the debt”.

Looking back, Worrell may have come out just in time.


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Credit event

Norske Skog triggered credit event, according to ISDA rules

The ISDA Determination Committee met on Friday. The 15 participating members unanimously agreed that the recent debt swap of paper company Norske Skog qualifies for a restructuring credit event. The committee also agreed to hold a credit event auction to determine the settlement price of credit default swaps referencing Norske Skog.

ISDA initially met at noon on Monday in London to discuss the matter, but failed to reach a verdict that day. The committee met again on Friday at 12 noon to continue discussions.

Norske Skog’s disputed debt swap comes amid a long-standing struggle between its secured and unsecured bondholders.

Last week, Norske Skog obtained consent from its 2017 7% ticket holders of 218 million euros to exchange those tickets for 2026 dated exchange tickets, perpetual tickets and rights of action in cash. Upon expiration, approximately 76% of the overall capital was surrendered and withdrawn.

Norske has sought to reduce its net debt to NKr 1 billion through the exchange and reduce annual cash interest payments by around NKr 150 million.

According to DTCC figures, outstanding credit default swaps referencing Norske Skog cover net debt of $ 281 million, or $ 7.1 billion gross.

ISDA agreed last Friday to comment on the credit restructuring event.


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Credit event

Journalist backs story ISDA declared credit event

Refused Refused No


Tony / Flickr


Derivatives Intelligence (part of Institutional Investor) reports that the International Swaps and Derivatives Association has determined that Greece has triggered a credit event in connection with its debt restructuring.

This would trigger the payment of credit default swaps – insurance contracts on Greek bonds issued under Greek law.

But we don’t know why they have this and no one else knows, and we can’t confirm. Therefore, we have doubts as to the veracity of this report. While everyone expects this to be the result, the report is not currently released.

The ISDA committee met today to discuss the matter and said it will issue a statement on whether or not a credit event occurs once Greece officially activates the clauses. collective action that it recently included in its Greek debt issues.

The consensus is that activating CACs will indeed trigger a credit event, but analysts have waited all day for a decision to be released here, in vain (again).

Isda credit event rumor pdf


@KevinDuganDI


UPDATE: Lauren Dobbs, spokesperson for ISDA in New York, denied the veracity of this report in a telephone interview with Business Insider. They have yet to make an official announcement on the credit event.

UPDATE II: The reporter who composed the above story is now Tweeter a screenshot of an ISDA document allegedly confirming a credit event (h / t @LemaSebachthani).

Isda credit event rumor pdf 2


@KevinDuganDI




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Credit event

The Greek collateral grab – a credit event after all?

Newsletter: Europe Express

The last of Finland theoretical agreement get cash collateral from him in Greece’s bailout – well, maybe Finland change the case after all. This is after other lenders complained about special treatment.

(Some Darth Vader quote comes to mind …)

Although Finland still wants guarantees in some form. And let’s not forget that he managed to strike a deal with Greece in the first place. An agreement that received a sign of tacit approval of the July 21 agreement of the euro zone on the new rescue plan for Greece.

The fact that Finland still wants guarantees is important, as there are still Greek obligations under English law which could easily default if this guarantee counts as Greece guaranteeing “external indebtedness” on terms higher than these ratings. . We have noted the wording of the circular of a variable rate note of 450 million euros maturing in 2012 for this purpose. Moody’s is warning Greece facing a massive default on all of its payments if the collateral issue delays the bailout, but we increasingly believe there is an emerging case of default on these notes. It would take a holder of this obligation (no doubt more an army of lawyers) to settle this question of “external indebtedness” and advise Greece to start the ball rolling. This is unlikely to happen as the Eurozone takes its time to tear itself apart over the legitimacy or terms of this cash collateral.

But the fact that an agreement already also exists, as this might not simply be a Greek CDS credit event separate from a bond default. In fact, the terms of the credit event could have been in place as soon as the Finnish finance minister bragged about the guarantee deal last week.

Although this is not a type of credit event, many have come across it.

A standard CDS contract for a Western European sovereign contains only three credit events: default, restructuring, or moratorium.

Reader Yogi Bear initially pointed out to us that Greece is therefore likely not subject to a bond acceleration credit event. (Foreign law obligations require that payments be expedited in the event of default, suggesting that this credit event could apply.) Of course, it is not impossible that there are old or overdue contracts. measure containing this credit event – but in any case, you will have to wait for the bonds to default and speed up payments. Even eurozone leaders couldn’t be stupid enough to let Finnish politics trigger a Greek default after all the hard work it took to build a voluntary bond swap, one would think, so act to prevent a accelerating bonds at all costs.

Although they were stupid enough to let Finland go this far.

Next, the Obligation Default credit event is presented.

According to the definitions of Isda 2003 credit derivatives, an Obligation Default credit event is triggered when the bonds…

… Become liable to be declared due and payable before they would otherwise have been due and payable as a result of, or on the basis of, the occurrence of a default, event of default or other condition or similar event (however described), other than a failure to make any required payment, with respect to a reference entity under one or more obligations

(Default of Obligation and Obligation Accelerator cannot apply to the same CDS contract, in case you were wondering.)

It is a very interesting place of Yogi Bear.

It’s pretty broad as a definition. So broad that in fact, we believe this could be one of the reasons that credit default events are rarely found in modern CDS contracts. You would be a little nervous to sale such a contract. These events can be so rare that Isda’s Determination Committee for Credit Events doesn’t even list Obligation Default as a query option on its website (we assume it reports to “Other”):

But it could well be that such a contract is gathering dust in a shady corner of Mayfair or Connecticut. A contract on Greece.

As Yogi Bear notes, the key question is what it means to ‘become capable of’ in what is publicly known about Finland’s deal with Greece. However, whatever happens to the deal afterwards, the Finnish finance minister has declared an agreement on guarantees. Remember that the threshold for a credit event request is a publicly available source (two, technically). If you think there is no way that a simple ministerial statement could trigger a credit event, there is a strange echo in Argentina. We have already heard of official statements on the possibility restructuring that actually led to questions about credit events as the country defaulted in 2001.

This assumes that the breach of obligation dates from the initial declaration that Greece will guarantee the Finnish loan (part of the EFSF). As Yogi Bear points out, the terms of the FRN 2012 provide that in the event of default, Greece must default on its obligations …

… And continue to be in default for 30 days after written notice has been given to the Republic by the holder of any ticket

There are other obligations under foreign law where there must be 25 percent of the holders, although in this one it is any holder.

Thus, it could happen to a holder putting his head above the parapet to inform Greece. Likewise, a CDS holder could put his head above the parapet in order to question the Isda determination committee. You might not bother to do the latter if you expect Greece to experience a default or a restructuring credit event anyway in the near future (perhaps repayments or deliverables. under the contract are different, for example) and any contract containing a credit default event is likely to be rare, as we have noted.

But from this perspective, there does not appear to be an outright obstacle to the holders challenging this collateral agreement. In fact, we will be surprised if Greece and the eurozone avoid a challenge.

Information on the holders of the FRN 2012 is not easy to find, but a simple HDS search on Bloomberg showed that Eurobank EFG held around 32 million euros in several portfolios until at least the end of July. We will check other foreign law obligations as we go along (and if you yourself are the lucky owner of a probable suspect, do not hesitate to contact us …)

Oh, and we’ll check if other Greek bonds have cross-default clauses as well.

It could get messy.

(Massive hats off to Yogi Bear)

Related links:
Learn more about the foreclosure of Greek collateral – FT Alphaville
Moody’s dissatisfied with Greek collateral foreclosure – FT Alphaville
Greco-Finnish deal reopens bailout debate – FT


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Credit event

CBOE to relaunch Credit Event Binary Options (CEBO) contracts on March 8

CHICAGO, February 22, 2011 / PRNewswire / – The Chicago Board Options Exchange (CBOE) announced today that the Tuesday March 8, the Exchange will begin trading in newly designed Credit Event Binary Options (CEBO) contracts.

(Logo: http://photos.prnewswire.com/prnh/20100707/CBOOLOGO-a)

Credit event binary options contracts allow investors to express an opinion that a company will experience a “credit event” (bankruptcy). Due to the inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also offer the advantages of price transparency available through a regulated exchange, currently unavailable in the OTC credit default swap markets.

A CEBO contract has only two possible outcomes – a payment of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

The CBOE, which began trading single-name and basket-credit event binary options in 2007, recently received SEC approval to change the rules for credit event binary options.

A change simplifies the terms of a payment for CEBO contracts, allowing the CBOE to list CEBO contracts that specify bankruptcy as the sole trigger for a payment.

The amount of the CEBO contract payment in the event of a credit event has also been revised. If bankruptcy occurs before the contract expires, the payment amount will be $ 1,000 by contract.

Initially, the CBOE will offer ten single-name CEBO contracts for negotiation. Two of these contracts will be introduced on 8 March, followed by eight out of March 9:


Company Name

CEBO ticker

Release date

AK Steel Holding Corporation

AKSC

8 March

Advanced Micro Devices, Inc.

AMDC

8 March

Arvinmeritor, Inc.

AMD

March 9

American Axle & Manufacturing Holdings, Inc.

AXLC

March 9

Hovnanian Enterprises, Inc.

HOVC

March 9

Huntsman Corporation

HUNC

March 9

MBIA inc.

MBID

March 9

The PMI Group, Inc.

PMID

March 9

Smithfield Foods, Inc.

SFDC

March 9

Tenet Healthcare Company

THCC

March 9


For contract specifications and other information on CEBOs, see www.cboe.com/credit.

CBOE, the largest options exchange in the United States and creator of listed options, continues to set the bar for options trading through product innovation, trading technology and educating investors. CBOE offers options on stocks, indices and ETFs, including proprietary products, such as the S&P 500 (SPX) options, the most active US index option, and options on the CBOE volatility index (VIX) . Other products designed by CBOE include equity options, safety index options, LEAPS options, FLEX options and benchmark products such as the CBOE S&P 500 BuyWrite (BXM) index. CBOE’s hybrid trading system integrates electronic and auction trading and is powered by CBOEdirect, a state-of-the-art proprietary electronic platform that also supports C2 Options Exchange (C2), CBOE Futures Exchange (CFE), CBOE Stock Exchange (CBSX) and OneChicago. CBOE is home to the world-renowned Options Institute and www.cboe.com, named “The Best of the Web” for options information and education.

The CBOE is regulated by the Securities and Exchange Commission (SEC), and all transactions are cleared by the AAA-rated Options Clearing Corporation (OCC).

CBOE®, Chicago Board Options Exchange®, CBSX®, CBOE Stock Exchange®, CFE®, CBOEdirect®, FLEX®, Hybrid®, LEAPS®, CBOE Volatility Index® and VIX® are registered trademarks, and BuyWrite (SM), BXM (SM), SPX (SM), C2 (SM), C2 Options Exchange (SM) , CBOE Futures Exchange (SM) and The Options Institute (SM) are service marks of Chicago Board Options Exchange, Incorporated (CBOE). Standard & Poor’s®, S & P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services, LLC. and have been authorized for use by CBOE.

CBOE-OE

THE SOURCE Chicago Exchange of options of the board of directors


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