Exclusive: Lessons from the Experian experience
On paper this looks like a straightforward win for the CDS lobby; cash bondholders would have been happy with a change of control put clause. But there is one very important factor to be taken into account.
Corporate treasurers can no longer ignore credit default swap buyers because the credit market is increasingly integrated, writes Louise Bowman.
Last night’s decision by noteholders in UK credit reference checking firm Experian's 2013 bonds to incorporate a change of control coupon step-up clause into the documentation is being hailed in the market as a triumph for CDS investors - and even a shift in the balance of power from bondholders to CDS holders in corporate restructurings. This is the tail wagging the dog, recognition of the increasing importance of the credit derivatives market to corporate fundraising.
There are a couple of problems with this. The basics of the case were that UK retail group GUS decided to split into two separate businesses, Experian and Argos, earlier this year. This separation triggered technical default on outstanding debt but bondholders were asked to waive the default in return for a 75bp payment (outstanding debt was eventually to be rolled into Experian). The situation triggered serious questions for CDS investors as a change of control put clause would not have ensured a deliverable for the CDS and the risk remained that it might potentially be orphaned (ie have no deliverable at all).