Novo Banco Swaps Payout Sent for Review Following Split Vote

  • ISDA committee fails to reach supermajority needed for ruling
  • Decision centers on transfer of bonds to Portuguese bad bank

An industry group failed to reach a decision on whether credit-default swaps insuring Novo Banco SA debt should pay out, triggering an external review.

A committee of 15 dealers and money managers was unable to agree on whether a governmental intervention credit event had taken place at the Portuguese lender, the International Swaps & Derivatives Association said in a statement on Tuesday. Eleven committee members voted to say no event occurred, one short of the 12 needed for a ruling. The other four members said an event had taken place.

An outside panel will now make a decision, marking only the third time that an ISDA committee has been unable to agree on whether derivatives insuring debt should be triggered. The arbitrators will determine the fate of contracts covering a net $428 million of Novo Banco debt, and decide the first test of rules introduced in 2014 that were intended to boost protection against losses imposed by governments or regulators.

“For users of credit-default swaps, this is exactly what they bought them for,” said Roger Francis, a credit analyst at Mizuho International Plc in London. “If it doesn’t cover this, then what is the point of the product?”

The decision centers on the Bank of Portugal’s transfer of about 2 billion euros ($2.2 billion) of Novo Banco senior bonds to a bad bank last month. The move caused prices for the five bonds to plunge to around 10 cents on the euro from more than 90 cents. The central bank ordered the transfer after European Central Bank stress tests showed a 1.4 billion-euro capital shortfall at Novo Banco under an adverse scenario.

The ISDA committee will reconvene on Wednesday at noon, London time, to discuss a separate question regarding whether a succession event has occurred at Novo Banco, the group said. There were 2,372 outstanding contracts tied to Novo Banco debt as of Jan. 1, according to Depository Trust & Clearing Corp.

The two questions previously referred to external panels by ISDA committees were about casino company Caesars Entertainment Corp. last year and cement maker Cemex SAB in 2009. The panels comprise of at least three people.

ISDA is introducing new rules for its Determinations Committees, which make decisions in the $12 trillion credit derivatives market, to ease conflicts of interest, according to a statement on Monday. The committees have come under scrutiny because they include the biggest traders of default swaps, such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Pacific Investment Management Co.

Before it's here, it's on the Bloomberg Terminal.