The International Swaps and Derivatives Association (Isda) declared the first restructuring credit event to be settled under its Small Bang Protocol on August 12.
A majority of 13 of the 15 members of Isda’s Credit Derivatives Determinations Committee for Europe, the Middle East and Africa (EMEA), said a restructuring credit event had occurred in respect of French media and electronics firm Thomson. Bank of America Merrill Lynch and Legal & General voted against. Both firms declined to comment as to why they disagreed.
However, the committee was unanimous in its decision that one or more auctions should be held for the outstanding credit default swap transactions of varying maturity buckets.
On June 15, due to deterioration in its creditworthiness, Thomson agreed with bondholders to defer payment from June 17 to July 25 of $72.5 million principal on the 6.05% senior notes. By August 12, the firm had reached an agreement with the majority of its creditors for restructuring, announcing plans to reduce its gross senior debt by 45% to €1.29 billion from €2.94 billion.
This will be achieved through a €350 million rights issue and by issuing €639 million of notes mandatorily redeemable into 964 million ordinary shares in 2010 and 2011. In addition, the firm will issue up to €300 million of disposal proceeds notes maturing on December 31, 2010, to be repaid in cash with the proceeds from the disposals of media technology firms Grass Valley and PRN, and cinema advertising company Screenvision. The restructuring will also provide for €400 million to remain on Thomson’s balance sheet.
Thomson’s restructuring plans depend on “the extent to which additional creditors’ support is obtained”, the firm said. Deutsche Bank, which holds a large amount of bilateral private placement notes, is considered the “most significant” creditor. Discussions are under way with the bank about its participation in the restructuring. The firm declined to comment on the progress of these talks. An extraordinary general meeting to approve the restructuring plans is planned for the fourth quarter.
The date of the auction or auctions has yet to be decided, and will depend on how many contracts are triggered in each bucket, which itself is dependant on which obligations are deliverable, an official at Isda said.
The last time a restructuring credit event occurred was in June 2002, when Xerox announced a renegotiation of $7 billion of loans outstanding under a fully-drawn revolving credit facility due in October 2002.
Isda’s Small Bang, which was launched on July 14, provides a new protocol for restructuring. Previously, in Europe, if a protection buyer triggered a CDS after a restructuring, the maturity of the bonds that could be delivered to the seller was restricted to the longer of five years and the remaining maturity of the contract for restructured obligations, and two-and-a-half years and the remaining maturity of the contract for non-restructured obligations. If the protection seller triggered the contract, bonds could be delivered with a remaining maturity of up to 30 years.
Under the Small Bang, the number of maturity buckets was increased to eight – market participants could opt to cash settle by referencing the auction result of the relevant bucket, or decide to physically settle with bonds or loans that fall within the bucket.
Isda’s Big Bang established determinations committees for five geographical areas: the Americas, EMEA, Japan, Asia excluding Japan, and Australia and New Zealand. The committees each consist of 10 dealers – nine of which are present on all five panels – selected by credit derivatives trading volumes, and five buy-side firms.
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