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Politics : American Presidential Politics and foreign affairs
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To: TimF who wrote (35519)5/13/2009 12:18:39 PM
From: DuckTapeSunroof   of 71588
 
A Note on GM and CDS

"...a majority can never bind a minority in these situations <to trigger Credit Default Swap payouts>. That's what bankruptcy is for."

posted by Stephen Lubben
Credit Slips - (A blog on all things about credit and bankruptcy. We are seven academics who will use this space to do what we like to do when we get together--discussing and debating what does happen and what should happen when consumers and businesses borrow money.)
creditslips.org

It is CDS day on the blog.

Both the comments to my prior post and a recent post by Felix Salmon raise the issue of why GM's attempts at an out of court restructuring don't constitute a "restructuring" credit event under the ISDA credit default swap definitions.

I wanted to expand on the quick answer I gave in the comments.

First, workouts could constitute restructurings, but my understanding is that many North American CDS contracts do not contain "restructuring" triggers, because such a trigger requires an affirmative "opt in" under the ISDA settlement matrix (essentially a spreadsheet of default CDS terms).

Second, a restructuring only occurs when "agreed between the Reference Entity . . . and a sufficient number of holders of such Obligation to bind all holders of the Obligation." 2003 ISDA Credit Derivatives Definitions § 4.7 (emphasis mine). Under the Trust Indenture Act an exchange offer would require 100% consent to constitute a restructuring as so defined -- because a majority can never bind a minority in these situations. That's what bankruptcy is for.

May 12, 2009 at 3:26 PM in Corporate Bankruptcy
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