Credit-Default Swaps Panel Asked to Rule on Sara Lee Succession

A committee of banks and investors that governs credit-default swaps was asked to rule how Sara Lee Corp.’s split into a U.S. meat business and global coffee and tea company will affect contracts linked to the company’s debt.

The International Swaps and Derivatives Association’s determinations committee will rule on whether the split of Sara Lee is a so-called succession event, the New York-based trade group said today on its website.

Sara Lee, the Downers Grove, Illinois-based maker of Ball Park Franks and Jimmy Dean sausage, renamed its meat business Hillshire Brands Co. and spun the unit from its coffee and tea division, which was renamed D.E. Master Blenders 1753 NV. Hillshire began trading yesterday, making the split official.

Under credit swaps succession rules, if a new entity takes on more than 25 percent of an existing company’s debt obligations, while the old company keeps at least 25 percent of the obligations, then credit swaps on the old company are split between the new and old entities, according to definitions published by ISDA. If a new entity takes on 75 percent or more of the old company’s obligations, then the derivatives become linked solely to that entity.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

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