Peregrine: The case of the double haircut
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Peregrine: The case of the double haircut

Some swap counterparties of defunct Hong Kong investment bank Peregrine are claiming a double discount on what they owe its liquidators. Ridiculous? Perhaps, but uncertain enough for an appeal to a UK court. The implications, for swap documentation and close-out netting with poor-credit counterparties, could be huge. By David Shirreff.

A year-and-a-half since Peregrine Investments Holdings filed for liquidation in Hong Kong, an interesting debate is still raging over how to settle its swap book. The ultimate decision that will be sought from a UK court could have wide implications for the swap industry, and how much banks reserve against swaps with lesser credits.

Peregrine subsidiary Peregrine Fixed Income (PFI) wrote swaps with more than 200 counterparties. Many of them are companies in Thailand, Korea and Indonesia, where the currencies and credit ratings have taken a severe battering. PricewaterhouseCoopers, liquidators of Peregrine, reckon that, when they were appointed, PFI was owed about $500 million on swaps with good-credit counterparties, such as the western investment

banks. It is also trying to claim around $800 million to $900 million on swap agreements with lesser credits. Some of these swap agreements are "plain vanilla", others "were more complex off-balance-sheet transactions", says David Hague, a PwC partner in Hong Kong. Often such deals were simply modified term loans to keep them off the company's balance sheet.

The value of the claims against these lesser credits is uncertain because some counterparties are arguing that they owe a discounted amount, because of their discounted credit standing.

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