CDS Debt Decoupling to be Tested by Lyondell

OK, OK, I know that this is a blog about preferred shares … but I can’t resist sneaking in the occasional story about Credit Default Swaps.

In the primer on CDS I referred to a paper by Hu & Black regarding debt decoupling:

We have also heard from bankruptcy judges that they sometimes see odd behavior in their courtrooms, which empty crediting might explain. For example, one judge described a case in which a junior creditor complained that the firm’s value was too high, even though a lower value would hurt the class of debt the creditor ostensibly held.

Now we’ve got a reasonably big name company going to the mat in US courts at … well, not quite the peak of hysteria, but pretty close … to “recouple” the interests of the cash and derivative markets … as reported by the Financial Times:

Lawyers for Lyondell Chemical, the US unit that is in Chapter 11, have secured a temporary restraining order and preliminary injunction against a group of creditors.

“The threat of CDS holders trying to force companies into an insolvency in order to trigger their recovery rights against their CDS counterparty will almost certainly be an issue in the wave of debt restructurings this year,” said Mark Hyde, head of debt restructuring at Clifford Chance, an adviser to LyondellBasell in Europe. Mr Hyde said that in cases where investors attempted such actions, it could undermine chances of completing a successful restructuring. Mr Hyde declined to comment on the specifics of the Lyondell case.

LyondellBasell could become an important test case for CDS markets and the restructuring industry.

There have already been a number of cases where CDS investors have been able to exert a strong influence on either the financing or restructuring of companies. These include VNU, the multinational media business, GUS, the UK retail group, and Cablecom, a Dutch communications company.

However, there have not yet been reported examples of CDS investors forcing a company into insolvency simply to trigger protection payments from the contracts they have bought.

This is fascinating. Watch this space … and make some popcorn.

One Response to “CDS Debt Decoupling to be Tested by Lyondell”

  1. […] The Lyondell situation is interesting because of the allegations that CDS-protected creditors are not acting in good faith. […]

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