09 Mar 2009, Donna Haws, Risk magazine
Recovery rates on loan-only credit default swaps (LCDSs) referencing the company were set at 8%, meaning protection sellers would need to pay protection buyers who opted for cash settlement 92% of the par value of the LCDS contracts.
Financial constraints caused by a slowdown in industrial production and falling aluminum prices led the company to file for Chapter 11 bankruptcy protection on February 12.
Currently, individual protocols are required to cash-settle CDS and LCDS trades because the auction procedure is not hardwired into the standard CDS contract.
This Thursday (March 12), the International Swaps and Derivatives Association will publish its auction settlement supplement, which will hardwire CDS settlement auction terms after a default or credit event. The supplement will also include precise definitions on what constitutes a credit event, whether an auction will be held, and whether obligations are deliverable.
See also: Isda to publish auction settlement supplement, launches close-out protocol
Low recovery rates set for Ferretti LCDS
Auctions held for CDSs referencing Nortel Networks
Auction sets values on British Vita LCDS