Thomson restructuring auction puts credit derivatives in spotlight

By Reuters Staff
October 7, 2009

A man walks past a billboard promoting French consumer electronics maker Thomson in Beijing November 4, 2003. By Jane Merriman
LONDON, Oct 7 (Reuters) – The opaque world of credit derivatives is in the spotlight ahead of an auction to settle contracts on a debt restructuring at French electronics company Thomson that could expose flaws in the process.

The auction is taking place as politicians and regulators push for more clarity and less complexity in credit derivatives markets, which were at the heart of the credit crisis that crippled the world’s banking system.

“Regulators will be watching this very carefully,” said Betsy Mettler, a partner at consultancy B&B Structured Finance.

“Given this is the first restructuring under a new system, and given the industry is trying to get away from the negative view of credit default swaps, there is a lot of pressure around this auction,” she said.

The finance industry has tried to simplyfy and standardise the process for CDS restructuring auctions in Europe, in theory to help a move to central clearing of these derivatives.

But Thomson’s has taken weeks longer than expected to organise and there is a risk that some investors could lose out.

“The Thomson auction is probably too obscure to attract a lot of mainstream attention, but if you are an investor and receive no pay-out, it will dent confidence in the CDS market and increase pressure for more reform,” said Michael Hampden-Turner, credit analyst at Citi.

“An awkward auction for Thomson at a time when other restructurings are likely will bring the CDS market into the limelight – just at the time when it needs to be able to demonstrate reformed efficiency and fairness,” he said.

“The situation has the potential to be quite messy.”

Credit default swaps are contracts that pay out if an issuer defaults on its bonds — effectively an insurance policy. They can also be triggered if a company restructures its debt.

The Thomson auction was triggered by the company’s restructuring in July.

The auction aims to determine how much buyers and sellers of Thomson credit default swaps get paid.

But because of a shortage of eligible Thomson bonds to deliver against CDS contracts, prices could get distorted and CDS holders might not get the value they expected contracts to deliver.

PRICE SQUEEZE
After a company restructures its debt, bonds with shorter maturities are usually worth more than longer-dated bonds as there is less risk of the company going bust in the near term.

In Thomson’s case, there are relatively few shorter-maturity bonds to deliver against the relevant Thomson CDS, which could mean their prices get squeezed even higher.

So sellers of protection on Thomson are likely to want to trigger the auction because the bond prices will rise. Under these circumstances buyers of protection on Thomson, on the other hand, might not want to participate in the auction in case Thomson restructures again at a later date, where they could get more money.

“With credit default swaps on Thomson trading at 20 to 25 percent upfront, the market’s implied default rate for a further credit event is very high,” said Tim Brunne, credit analyst at Unicredit.

When a company’s CDS trades “upfront” it means there is a high risk of default and investors have to make a big downpayment to buy protection against its default.

For those investors which bought Thomson CDS as a hedge against holdings of Thomson debt, they can deliver the underlying paper, which should result in close to full recovery, said Brunne.

If they bought CDS as a bet, they have taken a risk that settlement might be complicated by technical factors, he said.

There are nearly $2 billion worth of net notional CDS on Thomson, according to finance industry data provider Depository Trust & Clearing Corp.

Bonds eligible for delivery in the CDS auction total
about $1.2 billion, according to a list agreed by the credit derivatives committee of the International Swaps and Derivatives Association (ISDA).

There is also a 1.750 billion euro loan facility.

Investors that have sold CDS protection on Thomson have to decide to trigger the auction by Thursday.

Buyers of CDS protection on Thomson wishing to take part have until October 13. There is no date yet for the auction.
(Additional reporting by Jane Baird) ((jane.merriman@thomsonreuters.com; +44 207 542 3121; Reuters Messaging:jane.merriman.reuters.com@reuters.net))
Keywords: BONDS THOMSON

Wednesday, 07 October 2009 12:51:49RTRS [nL7697127 ] {C}ENDS

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Blogs ou should be reading

[...]Here is a Great Blog You Might Find Interesting that we Encourage You[...]…

Posted by gurtoertil | Report as abusive

Great website

[...]we like to honor many other internet sites on the web, even if they aren’t linked to us, by linking to them. Under are some webpages worth checking out[...]…

Posted by find out more | Report as abusive

Recommeneded websites

[...]Here are some of the sites we recommend for our visitors[...]…

Posted by Netflix New Releases | Report as abusive

Great website

[...]we like to honor many other internet sites on the web, even if they aren’t linked to us, by linking to them. Under are some webpages worth checking out[...]…

Posted by esta web | Report as abusive

Awesome website

[...]the time to read or visit the content or sites we have linked to below the[...]…

Posted by Alfredo | Report as abusive

Blogs ou should be reading

[...]Here is a Great Blog You Might Find Interesting that we Encourage You[...]…

Posted by web personal | Report as abusive

Gems form the internet

[...]very few websites that happen to be detailed below, from our point of view are undoubtedly well worth checking out[...]…

Posted by Julia planchas | Report as abusive

Check this out

[...] that is the end of this article. Here you’ll find some sites that we think you’ll appreciate, just click the links over[...]…

Posted by Silvia planchas | Report as abusive

Gems form the internet

[...]very few websites that happen to be detailed below, from our point of view are undoubtedly well worth checking out[...]…

Posted by drain cleaning | Report as abusive

Recommeneded websites

[...]Here are some of the sites we recommend for our visitors[...]…

Posted by plumbers | Report as abusive

Related…

[...]just beneath, are numerous totally not related sites to ours, however, they are surely worth going over[...]…

Posted by tmt investments Russia | Report as abusive

Great website

[...]we like to honor many other internet sites on the web, even if they aren’t linked to us, by linking to them. Under are some webpages worth checking out[...]…

Posted by auto insurance | Report as abusive

Awesome website

[...]the time to read or visit the content or sites we have linked to below the[...]…

Posted by auto insurance companies california | Report as abusive

Websites we think you should visit

[...]although websites we backlink to below are considerably not related to ours, we feel they are actually worth a go through, so have a look[...]…

Posted by pinguinalité | Report as abusive

Cool sites

[...]we came across a cool site that you might enjoy. Take a look if you want[...]…

Posted by clemson | Report as abusive

Links

[...]Sites of interest we have a link to[...]…

Posted by Charlotte plumbing | Report as abusive

Cool sites

[...]we came across a cool site that you might enjoy. Take a look if you want[...]…

Posted by stock market game | Report as abusive

Related…

[...]just beneath, are numerous totally not related sites to ours, however, they are surely worth going over[...]…

Posted by video pipe inspection | Report as abusive

Recent Blogroll Additions…

[...]usually posts some very interesting stuff like this. If you’re new to this site[...]…

Posted by plumber Tampa | Report as abusive

Check this out

[...] that is the end of this article. Here you’ll find some sites that we think you’ll appreciate, just click the links over[...]…

Posted by Butterfly Sex Toy | Report as abusive

Links

[...]Sites of interest we have a link to[...]…

Posted by My First Jack Rabbit Vibrator | Report as abusive

Visitor recommendations

[...]one of our visitors recently recommended the following website[...]…

Posted by General Renovations In Haifa שיפוצים כלליים בחיפה | Report as abusive

Websites worth visiting

[...]here are some links to sites that we link to because we think they are worth visiting[...]…

Posted by General Renovations In Haifa שיפוצים כלליים בחיפה | Report as abusive

Awesome website

[...]the time to read or visit the content or sites we have linked to below the[...]…

Posted by General Renovations In Haifa שיפוצים כלליים בחיפה | Report as abusive

Check this out

[...] that is the end of this article. Here you’ll find some sites that we think you’ll appreciate, just click the links over[...]…

Posted by General Renovations In Haifa שיפוצים כלליים בחיפה | Report as abusive

Websites worth visiting

[...]here are some links to sites that we link to because we think they are worth visiting[...]…

Posted by average new car insurance cost | Report as abusive

Sites we Like…

[...] Every once in a while we choose blogs that we read. Listed below are the latest sites that we choose [...]…

Posted by low auto insurance quotes comparison | Report as abusive

Recent Blogroll Additions…

[...]usually posts some very interesting stuff like this. If you’re new to this site[...]…

Posted by Renovations Bakrayot שיפוצים בקריות | Report as abusive

Blogs ou should be reading

[...]Here is a Great Blog You Might Find Interesting that we Encourage You[...]…

Posted by Renovations Bakrayot שיפוצים בקריות | Report as abusive

Websites you should visit

[...]below you’ll find the link to some sites that we think you should visit[...]…

Posted by Renovations Bakrayot שיפוצים בקריות | Report as abusive