Thursday, December 17, 2009

Japan Credit Swaps Panel Delays Ruling on Debt Talks

Original posted on Bloomberg by Shannon D. Harrington and Yusuke Miyazawa:

The panel that governs credit- default swaps in Japan asked a legal subcommittee to consider whether a private debt restructuring process that roiled contracts on consumer lender Aiful Corp. should trigger payouts.

The International Swaps and Derivatives Association’s determinations committee in Tokyo decided yesterday to defer a decision on the matter until the subcommittee reviews it, the New York-based trade group said on its Web site.

An unnamed market participant asked the committee last week whether Japan’s alternative dispute resolution process could cause payouts on credit-default swaps. The question was sparked by a dispute over contracts linked to Aiful, which stopped making loan payments as it entered ADR talks in September, according to one of the Kyoto-based company’s creditors.

The committee “does not generally believe that this is the correct forum for hypothetical questions,” ISDA said on its Web site. “However, in light of the potential relevance of this question to matters currently facing the Japanese credit derivatives market, the DC felt that it would be appropriate for further consideration to be given in this case.”

The legal subcommittee will hold its first meeting on the issue today at 7 p.m. Tokyo time, ISDA said.

Aiful has said it plans to meet creditors on Dec. 24 to vote on a restructuring plan that would end its ADR talks. Contracts protecting a net $1.34 billion of the lender’s debt were outstanding as of Dec. 11, making it the second-most insured Japanese borrower after the government, according to Depository Trust & Clearing Corp. in New York.

Public Information

“There is concern in the market whether or not credit- default swaps on Aiful can be triggered after Dec. 24,” said Junichi Shimizu, a credit analyst at Deutsche Bank AG in Tokyo. “Even if they do rule the ADR to be a credit event there’s still another issue, which is whether a release on Dec. 24 is sufficient as publicly-available information.”

The 15-member determinations committee, comprising dealers and investors including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG., rejected three attempts in October by holders of swaps on Aiful to get paid, citing a lack of publicly-available information. Aozora Bank Ltd. said in a statement submitted to ISDA that Aiful ceased making loan payments as part of the ADR process.

Market Confidence

Credit-default swaps, which are used to speculate on creditworthiness or to hedge against losses on bonds and loans, let buyers demand payment from sellers if the underlying borrower fails to make scheduled interest or principal payments, according to standard definitions published by ISDA. Banks, hedge funds, insurance companies and other investors use them to insure against default and to speculate on the creditworthiness of companies and countries.

Because creditors use the contracts to protect against losses on loans, investors have said that a protracted dispute over Aiful threatens to undermine confidence in Japan’s nascent credit-swaps market.

Japan’s outstanding swap contracts jumped to $887.3 billion as of June 30 from $554.2 billion a year earlier, according to Bank of Japan data. Globally, there were about $25.7 trillion in contracts outstanding as of Dec. 11, according to the Depository Trust & Clearing Corp., which runs a registry that captures most trading.

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