Credit derivatives lawyers are facing Christmas in the office trying to figure out whether millions of dollars of credit protection referenced to TXU Europe Group Plc is void. Even though its parent TXU Europe has gone bankrupt, this entity has not issued bonds or loans and therefore holders of credit protection cannot deliver a defaulted asset in order to receive par value, according to industry lawyers and traders.
The only liabilities TXU Europe Group Plc appears to have are drawn down letters of credit. Most credit derivative contracts state that the buyer of protection must deliver bonds or loans and lawyers are debating whether drawn down letters of credit qualify as loans. Gary Wiffin, deputy group treasurer at TXU Europe, declined comment.
Traders said hundreds of millions of dollars of protection is outstanding on all the various TXU Europe entities, including TXU Europe Ltd, which was the most heavily traded name within the TXU Europe family.
The clock is already ticking for lawyers to prove protection buyers can deliver the drawn down letters of credit. Dealers triggered the swaps immediately after TXU Europe filed for bankruptcy and were then given 30 days to send out notices of intended physical settlement and 30 business days after that to settle. If they miss the deadline the protection is cancelled. One dealer said his firm was aware of the potential problems but because it had trades on both sides it was left with no option but to trigger the contracts.
