The International Swaps and Derivatives Association will publish terms for a cash-settlement auction on loan credit default swaps (LCDSs) referencing Hawaiian Telecom over the coming weeks.
The Honolulu-based communications company, which is included in series 8-10 of the Markit LCDX index of North American LCDSs, filed for Chapter 11 bankruptcy protection in Delaware today.
It is the second LCDX credit event triggered in under a month. On November 18, dealers voted for a cash-settlement auction on Ontario-based door manufacturer Masonite, after it entered into a forbearance agreement with bank lenders. That auction has now been scheduled for December 19.
The cash-settlement auction process for LCDSs and CDSs, administered by London-based data vendor Markit and New York-based brokerage Creditex, involves dealers submitting tradable two-way prices to determine a recovery rate for the underlying debt. Protection buyers that opt for cash settlement receive the contract's par value, minus the recovery rate.
The procedure has recently undergone its biggest-ever test in the face of market dislocation. Since the beginning of September, events of default on companies such as Lehman Brothers and Fannie Mae have seen it used no fewer than eight times to settle widely-traded CDSs.
With CDSs, technical or actual defaults require the publication of an Isda protocol to initiate cash-settlement auctions. However, the procedure is embedded within LCDS documentation, obviating the need for protocols to be published on either Masonite or Hawaiian Telecom.
The two are the first LCDS reference entities to experience events of default since US video rental chain Movie Gallery, in October 2007.
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