Kirkland Alert

European Credit Derivatives Outlook

At a Glance

Despite the magnitude of the COVID-19 crisis, there were relatively few Credit Events triggered and auctions held in 2Q/3Q of FY 2020.

Recent Credit Events (Wirecard AG, Matalan) have added clarity to the circumstances under which European insolvency proceedings and restructurings (and corresponding proceedings for recognition under Chapter 15 of the U.S. Bankruptcy Code) will constitute “Bankruptcy” Credit Events under the most current version of the ISDA Credit Derivatives Definitions (the “2014 Definitions”).

Increasing use by the EMEA Determinations Committee of explanatory written statements provides useful indications of future determinations, notwithstanding the fact that the Determinations Committees (EMEA and others) are not formally bound by precedent.

Key factors in determining whether an insolvency proceeding or restructuring (and corresponding Chapter 15 recognition proceedings) will constitute “Bankruptcy” Credit Events under the 2014 Definitions are: 

  1. the inclusion (or lack) of a stay of general application;
  2. the presence (or absence) of an administrator;
  3. the degree of court involvement; 
  4. the extent to which the Reference Entity is required to satisfy maturing obligations during the proceeding;
  5. the relevant entity or entities which are the subject of the proceedings (and whether that entity is the Reference Entity).

The EMEA Determinations Committee generally is willing to modify typical auction settlement terms to ensure a fair result. This may result in acceleration or delay of typical auction timelines.

The introduction of the new “restructuring plan” procedure in the United Kingdom is unlikely in our view to significantly move the needle on Credit Event determinations, provided the debtor does not also invoke the new stand-alone moratorium. 

It is still too early to fully gauge the effects of the changes to the “Failure to Pay” Credit Event implemented by the 2019 Narrowly Tailored Credit Event Supplement to the 2014 Definitions. However, the increasing attention given by regulators both in the U.S. and Europe warrants taking the potential regulatory and reputational risks of narrowly tailored and/or manufactured Credit Events seriously.

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