Second credit-event auction to be held on LCDS

Masonite, which is a component of series 8-10 of the Markit LCDX North America indexes, entered into a forbearance agreement with bank lenders on September 16.

The turbulence in global financial markets has caused the technical default of a number of popular CDS reference entities, testing the cash-settlement auction process, which is administered by New York-based brokerages Creditex and Markit. The procedure involves a blind auction in which dealers submit tradable two-way prices for the defaulted underlying bonds. Outliers are stripped from the results, while banks are penalised for overly aggressive pricing.

The auction terms and date will be determined soon by Markit LCDX dealers and published on the International Swaps and Derivatives Association website.

The Masonite auction will be the second credit-event auction to take place under LCDS documentation. The first took place on October 23, when US-based video store Movie Gallery failed to make an interest payment on its first lien loan, triggering a failure-to-pay credit event on contracts referencing the company.

See also: LCDX index roll postponed indefinitely
Isda publishes European LCDS protocol
Isda launches LCDS update protocol

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