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There is significant interest in whether French supermarket Casino has triggered payouts on its credit-default swaps.
According to the Determinations Committee, the finance-industry group responsible for such matters, this is not the case. The committee confirmed its decision on June 2, then again on June 8 and August 2. It also confirmed a negative decision four more times, on August 4.
In fact, the Determinations Committee has received at least eight inquiries regarding whether Casino’s debt struggles have led to a Credit Event that would result in payouts for CDS holders. In comparison, the committee has only received five questions about Credit Suisse AG, which no longer exists as an independent entity.
Casino, however, is still operating. The French supermarket chain received assistance from Czech billionaire Daniel Křetínský in July after entering negotiations with creditors.
CreditSights analysts are optimistic about Casino’s senior term loans. They believe that unsecured bondholders will face difficulties in challenging the current restructuring plan, which is designed to improve the bonds’ recoveries and has been described as “de minimis” by analysts.
Given these circumstances, the persistent influx of questions regarding Credit Events is noteworthy.
These inquiries are occurring during a resurgence of the CDS market, resulting in concerns about financial engineering and strategic defaults as bargaining tools with creditors. It is also possible for companies to seek DC rulings to demonstrate that they have not created an Event of Default, or for dissatisfied CDS-owning creditors to attempt to persuade the DC to declare a Credit Event. The exact motivations remain unclear.
The involvement of a French borrower is significant because US regulators have taken steps to address concerns about “manufactured” defaults, in addition to the Isda contract changes previously mentioned.
Specifically, the Securities and Exchange Commission has implemented Rule 9j-1, which covers security-based swaps, including the CDS market. The SEC cites several benefits of this rule, including a shift towards reflecting the underlying entity’s fundamental credit risk in single-name CDS contract prices rather than counterparty credit risk or the likelihood of fraudulent activity.
However, these regulations do not apply to Casino. Nevertheless, they offer a less pessimistic explanation for the revival of the CDS market, at least for US borrowers.
Further reading:
– Credit default swaps are making a comeback (FTAV)
– The recurring issues with the CDS market (FTAV Classic)
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