On November 18, dealers voted for an auction on LCDS trades referencing the company, which is included in series 8-10 of the Markit LCDX index of North American LCDSs.
Ten major dealers participated in the auction - the second ever to be held on a credit included in the LCDX. Under standard LCDS terms, protection buyers that opt for cash settlement receive the contract's par value, minus the recovery rate.
The global financial crisis has led to the default or technical default of a range of popular CDS and LCDS reference entities, testing the cash-settlement auction process. Administered by London-based data provider Markit and New York-headquartered brokerage Creditex, the process involves dealers submitting tradable two-way prices to determine recovery rates for the underlying debt.
The International Swaps and Derivatives Association is currently launching a CDS protocol mandating an auction on Chicago-based media firm Tribune, which filed for Chapter 11 bankruptcy on December 8. The firm was included in a number of the US Markit CDX and LCDX indexes.
However, the declaration of a credit event on the company will not encompass LCDS or LCDX trades, pending a dealer vote scheduled to be held today.
On December 1, Honolulu-based Hawaiian Telecom also filed for Chapter 11 bankruptcy protection, triggering a credit event. Like Masonite, the communications firm is also included in series 8-10 of the Markit LCDX index of North American LCDSs.
A cash-settlement auction on the company is due to take place on December 17.