July 9 (Bloomberg) -- Bradford & Bingley Plc’s failure to pay interest on some of its subordinated bonds will trigger settlement of credit-default swaps linked to about $414 million of the nationalized mortgage lender’s debt.

Dealers and investors agreed today that the Bingley, England-based company’s decision not to pay interest on 125 million pounds ($202 million) of 6.625 percent subordinated bonds maturing 2023 was a “credit event,” the International Swaps and Derivatives Association said on its Web site.

The ruling will prompt an auction to settle credit swap contracts even though the U.K. government changed the terms of the bank’s nationalization in February, allowing it to miss coupon payments without that constituting a default. Bradford & Bingley said in May it didn’t intend to pay interest on the notes, which form part of the bank’s so-called lower Tier 2 capital.

“Credit-default swap holders can now expect a payout based on the credit event,” said Louis Gargour, chief executive officer at hedge fund LNG Capital LLP in London. “It reinforces confidence in the efficient functioning of the market.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Bradford & Bingley, the country’s biggest lender to landlords before it was nationalized, missed a payment due on June 16 and the 14-day grace period expired without the interest being paid. Morgan Stanley asked the committee of swap traders to rule whether the non-payment was a credit event, ISDA said.

The extra yield investors demand to hold lower Tier 2 bonds in pounds rather than similar-maturity government debt widened to a record 7.25 percentage points on March 30, and was at 5.42 percentage points yesterday, Merrill Lynch & Co.’s Sterling Lower Tier II Index shows.

Bradford & Bingley’s deposits and branches were transferred to Spain’s Banco Santander SA after it was nationalized in September.

For Related News and Information: For new issues: NIM4 <GO> For top bond stories TOP BON <GO> News on credit derivatives: TNI CDRV <GO> Credit-default swaps sector graphs: GCDS <GO> World credit-default swaps pricing: WCDS <GO> Biggest credit-default swaps movers: CMOV <GO>

Last Updated: July 9, 2009 08:11 EDT