ISDA to Rule on Sharp's Credit Swaps, Putting Focus on Japan Use

  • $1.86 billion of default swaps tied to Sharp are outstanding
  • ISDA panel to meet at 9 a.m. in London to consider case

Bond dealers and investment firms will rule on whether buyers of derivatives protecting against a default by Sharp Corp. will receive payouts after the electronics maker amended loan terms, putting attention again on how Wall Street-born swap agreements work in Japan.

The International Swaps & Derivatives Association said its determinations committee has accepted a request to decide whether a so-called restructuring credit event occurred, according to its website. A market participant had submitted a request on April 4 after the Japanese electronics company reached a deal with lenders Bank of Tokyo-Mitsubishi UFJ Ltd. and Mizuho Bank Ltd. to lower borrowing costs, and extended the term of a 510 billion yen ($4.65 billion) syndicated loan.

The Sharp case puts the spotlight again on when credit-default contracts in Japan, where bank-supported restructurings of large companies are more common than bankruptcies, can be called upon to pay out. There are $1.86 billion of outstanding swaps tied to Sharp, which would result in a maximum payout of $123.4 million after overlapping trades are accounted for, according to the Depository Trust & Clearing Corp., which runs a central registry for the market.

Meeting Today

ISDA’s Japan determinations committee will consider whether a credit event has occurred in a meeting at 9 a.m. London time, according to Lauren Dobbs, a spokeswoman for ISDA in New York. Members on the Japan panel include Bank of America N.A., Goldman Sachs International, Nomura International Plc, and Citadel LLC, ISDA’s Web page shows.

Toyodo Uemura, a spokesman at Sharp, declined to comment.

Banks, hedge funds, insurance companies and other asset managers use credit-default swaps to hedge against losses or to speculate on the creditworthiness of companies, countries or other borrowers. The contracts 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.

With Sharp’s bonds trading at 90 yen or more of face value, sellers of CDS on Sharp face limited payouts if ISDA declares a credit event, according to Takao Matsuzaka, a Tokyo-based credit analyst at Daiwa Securities Group Inc. The swaps will pay the holders of the agreements the difference with the par price.

Rescue Deal

Sharp signed an agreement with Taiwan’s Foxconn Technology Group last week seen as a rescue deal that would give the electronics maker a chance to recover from a long slump. The Japanese company said in a statement on April 1 that it reached a basic deal with its two main lenders Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank “regarding amendments to the terms and conditions of the existing borrowings” from the banks.

Aiful Corp. became the first Japanese company to force a settlement of credit-default swaps in 2010 following a restructuring. The ISDA panel rejected three requests to rule if payments on Aiful were due, citing a lack of public information for a judgment. Other local companies including Japan Airlines have since triggered payouts on swap agreements.

Determinations committees compare available information with the legal conditions set out in ISDA’s definitions to decide if a credit event has taken place. ISDA’s Japan committee is one of five regional panels tasked with judging such matters, and each committee comprises 10 sell-side dealers and five buy-side voting firms, according to ISDA’s website.

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