Distressed Diaries —  Ardagh CDS and the empty glass paradox

All eyes were on Ardagh’s CDS after Arini challenged its senior unsecured notes being included in the final list of deliverable obligations to settle contracts.

The fund manger argued that, because the bonds had already been marked to be equitised as of the CDS trigger date (when the restructuring was both effective and binding) then their outstanding principal balance should be zero — since they effectively no longer existed. Arini went on to claim that any finding that the bonds still had a non-zero OPB would turn them it into “Schrödinger’s Obligations” — existing in two incompatible states at once.

Tresidor and Laurion (the latter advised by Milbank) then joined the fight by issuing counter challenges defending the inclusion of the notes.

The challenge was eventually rejected by the EMEA Credit Derivatives Determinations Committee in a split vote, with Citi and Pimco dissenting on the decision. That result means SUNs will be included, and so Ardagh’s equity valuation will influence the final payout as part of an alternative asset package delivery mechanism to replace the bonds.

This hotly contested debate followed the DC having failed to achieve a supermajority ruling on the credit event trigger in the first place, which meant it had to call upon an external review panel of the International Swaps and Derivatives Association. The panel of KCs determined the September tigger date, from which CDS contracts must pay out to protection holders, but did not specify how that payout would be handled at auction.

In this episode of Distressed Diaries, our host, senior distressed reporter Bianca Boorer, sits down with 9fin editor and our resident CDS expert Dan Alderson to go through the ins and outs of this rejected challenge and what it means for the CDS market as a whole.