Codere Default Swaps Ruling Sought on Day of Bond Payment

The International Swaps & Derivatives Association said it will rule whether Codere SA’s delayed bond payment has triggered credit-default swaps on the same day the Spanish gaming company honors its commitments.

“If ISDA says it’s a default, I throw my hands up,” said Aengus McMahon, a credit analyst at ING Groep NV in London. “It’s not intuitive that there’s no default on the underlying instrument and CDS gets triggered anyway.”

Codere said Sept. 13 it would pay a coupon on $300 million of 9.25 percent bonds today, two days after the end of a 30-day grace period, as it negotiated with lenders to refinance the business. It changed the terms of a 99 million-euro ($132 million) loan from private-equity firms Canyon Partners LLC and Blackstone Group LP’s GSO Capital Partners that would have blocked the coupon by also requiring the facility to be repaid.

The delayed payment allows buyers to claim compensation on a net $444 million of debt. ISDA said today that its determination committee of dealers and investors will consider whether there has been a failure-to-pay credit event.

“The whole thing strikes me as bizarre and shows that people need to be careful with the CDS market,” McMahon said.

Confidence Threat

It’s the latest threat to confidence in the credit derivatives market, which is undergoing the biggest overhaul since 2003 after Greece’s debt restructuring last year and the nationalization of Dutch lender SNS Reaal NV raised concerns about potential flaws in the contracts.

ISDA’s determinations committees are divided into five regions and include 12 dealer banks and six asset managers. After a credit event ruling, an auction is held to determine the price of underlying bonds. Sellers of credit swaps tied to that debt then pay the buyer the face value of the contract, less the price set at the auction.

The banks with voting power on the European committee are Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS AG, ISDA said. Nomura Holdings Inc. and Societe Generale SA act as consultants to the group and don’t have voting power.

Asset Managers

The asset managers with voting rights are BlueMountain Capital Management LLC, Citadel LLC, D.E. Shaw & Co., Elliot Management Corp. and Pacific Investment Management Co., while Saba Capital Management LP acts as a consultant. ICE Clear Europe Ltd. and LCH.Clearnet SA are also members.

There are a total of 3,192 contracts covering Codere’s debt, Depository Trust & Clearing Corp. data show. The company is also included in the Markit iTraxx Crossover Index, though it is set to be removed when the benchmark changes this week.

Codere shares have risen about 15 percent since the debt agreement and were at 1.36 euros, the highest since July 10, at 1:30 p.m. in London.

It cost 5.15 million euros in advance and 500,000 euros annually to insure 10 million euros of the company’s debt for five years, according to data provider CMA’s quotes for credit-default swaps.

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