Thursday, April 30, 2009

Kazakh CDS settlement will prove test case

Posted on Reuters by Isabel Gorst, Anousha Sakoui and Gillian Tett:

A committee linked to the International Swaps and Derivatives Association on Wednesday started procedures to settle the first set of credit default swaps contracts linked to an East European credit.

The so-called determination committee of ISDA announced that the CDS contracts written on BTA, Kazakhstan’s biggest bank, will be triggered following a partial default by the group.

The move marks a potentially important test for the credit derivatives world: while CDS contracts have already been settled in relation to collapsed western companies – such as Lehman Brothers – so far, there have not been any cases involving emerging market names.

It will also be keenly watched in Kazakhstan, which is scrambling to find ways to restructure its financial sector amid a deepening credit squeeze.

The move could provoke an industry debate since ISDA’s decision to activate the CDS contracts was driven by Morgan Stanley, which is both a creditor to BTA and holds a large credit default swap position that pays out if a company defaults.

Morgan Stanley on Wednesday declined to comment on whether this meant it would benefit overall from a BTA default.

The situation highlights the complex nature of the incentives at work in the credit world, as large creditor banks increasingly conclude derivatives contracts that are designed to pay out if a company defaults.

This is the latest twist in a long-running and highly complex saga over BTA’s fate and the rest of the troubled Kazakh banking system.

Last week, Morgan Stanley and another unnamed international bank called in loans worth $550m to BTA, citing change of ownership covenants and downgrades by ratings agencies.

This prompted BTA this week to default on two loans and freeze debt repayments to avoid bankruptcy.

Anvar Saidenov, the chairman of BTA, said the bank was unable to accelerate repayment of its $15bn of debt and would present restructuring proposals to its lenders in early May.

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