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Portugal problem stumps Isda

Unable to agree on whether or not a credit event had occurred, Isda has had to turn to outside help to determine what has happened at Novo Banco.

As if the bail-in of senior bondholders in Portugal’s Novo Banco could not get any more contentious, Isda’s inability to determine whether or not it constitutes a governmental intervention credit event for holders of the $432 million CDS outstanding has sent proceedings into the realms of farce. Under Isda’s rules, if its own 15-member determinations committee cannot reach a super-majority then the decision is passed to an external review panel. A super-majority requires 12 of the 15 votes to pass.

Adrian Beltrami-160x186

Adrian Beltrami QC

Having extended their unsuccessful deliberations on the December 29 bail-in until January 12, the EMEA determinations committee then decided to refer the decision for external review. Four of its members – Goldman Sachs, Morgan Stanley, BlueMountain Capital Management and Cyrus Capital Partners – had voted for a credit event to have taken place, one too many for a no vote to pass. Members voting no were Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, JPMorgan, Nomura, AllianceBernstein, Citadel and Pimco.

Referring the decision externally was all well and good, apart from the fact that no such external review panel actually existed in Europe. External reviews on Isda credit event decisions have only happened twice before – with Mexican building materials company Cemex in 2009 and US hotel and resort group Caesar’s Entertainment in 2015 – both in north America.

On January 13, therefore, Isda invited its members to send nominations for potential panel members by email to A panel of Adrian Beltrami QC, Mark Hapgood QC and Sir Bernard Rix was subsequently convened.

Isda only introduced the concept of a governmental intervention credit event in 2014. For there to be this degree of dissent and procedural delay so early in its existence does not fill the market with confidence. Government intervention is deemed to have occurred when there is “a mandatory cancellation, conversion or exchange” or “any event which has an analogous effect”.

Investors argue that the bail-in constitutes an exchange as the bonds have been converted and exchanged into new obligations that are virtually worthless.

“A decision that a governmental intervention has not occurred would lead to an illogical outcome where holders of the transferred bonds suffer a near complete economic loss for the arbitrary reason that they are institutional investors, but this loss is not mitigated by their CDS protection despite paying a higher premium for protections against the risk of governmental interventions,” argues one investor. “This outcome will further diminish CDS’s efficacy as a tool to hedge credit risk and further erode confidence in the product.”

Isda is also trying to determine whether the bail-in constitutes a successor event, which occurs when one entity becomes liable for the obligations of another via a restructuring, potentially requiring a change in the CDS contract’s reference entity. 

The panel is due to reach its verdict on February 16. If it decides that it has, then the CDS will be transferred back to BES from whence they came. 

No one is coming out of this Novo Banco bail-in looking good. But for Isda to be so divided on this credit event so early on in the implementation of bail-in in Europe – and for an external panel to have to be hastily assembled when that division becomes intractable – does not bode well for CDS in future resolution disputes.

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