Marconi: An Alternative Story, So Far

  • 23 Sep 2002
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Roland Burley, at Bankgesellschaft Berlin AG in London, thinks there is more than one way to view the Marconi situation and explains why.

At the time of writing, 'major credit derivative dealers' had not started to serve credit event notices, to my knowledge, despite the implication that this was an imminent event. Why this is, I cannot say for certain, but I do take issue with the 'facts' presented in last week's Guest Column (DW, 9/16).

The paraphrased clause quoted in the article is extracted from the Bankruptcy Credit Event defined in full in the 1999 International Swaps and Derivatives Association's Credit Derivative Definitions (the definitions). I was on the ISDA working group that assisted with these definitions and, as I recall, the intention of the group was not to define the nature and phraseology of bankruptcy and insolvency for all time. However, I do not believe that it was in anyone's mind to create wording in this context that could be used in a restructuring scenario, which is how the author of the Sept. 16 Guest Column suggests.

It may, however, be argued that we unintentionally created such language. I believe that this is incorrect but, for the sake of argument, let us examine that point in greater detail.

The Marconi plc Aug. 29 press release referred to in the Sept. 16 Guest Column commences with the words:

"Marconi plc ('Marconi') announces that it has today concluded non-binding heads of terms (the 'Heads of Terms'), which sets out the principles for the financial restructuring of Marconi and its wholly owned subsidiary Marconi Corporation plc."

A small digression at this point, the drafting in last week's column suggests that the 'scheme of arrangement' relates to Marconi plc rather than Marconi Corp. plc. In fact, the words 'scheme of arrangement' are only used in context of Marconi Corp. plc and, I believe, not as a term of art. This is material if the Reference Entity in the credit-default swap in question is Marconi plc rather than Marconi Corp. plc.

The key issue is whether or not a non-binding heads of terms agreement can be said to constitute an 'arrangement' in the context of the definitions. I maintain that it cannot be construed in this way. To sign up to an agreement that does not bind you to act or, if one acts, does not dictate the course of action cannot be said to be: "action in furtherance of, or indicating its consent to, approval of, or acquiescence to ...."

The act/consent/approval/acquiescence must be an action that is more than simply preparatory. If not, then any company preparing contingency plans might be construed to be suffering a 'Bankruptcy' under the definitions. The Marconi plc board is not, to my knowledge, bound at this time to any particular course of action. If you questioned them and suggested that they may have committed an act that could be described as synonymous with bankruptcy, they would be horrified at the idea and reject it completely since this is exactly the path they are trying their utmost to avoid. The Marconi plc Aug. 29 press release avoids the topic and constantly refers to a 'Restructuring'.

I have not seen the Linklater's opinion in full but, with due deference to my learned colleagues and their expertise in this area, I believe that--if it is correctly quoted in the Sept. 16 Guest Column--they are wrong in their conclusion.

There is also a question of publicly available information ('PAI'). Although the Sept. 16 Guest Column boldly states that the Marconi plc Aug. 29 press release will be used as PAI, this is perhaps the most blatantly incorrect statement in the piece. PAI consists of 'information ... published in or on not less than the Specified Number of internationally recognised published or electronically displayed news sources...'. Reports in such sources about the Marconi plc Aug. 29 press release may constitute PAI--if they can be shown to support a valid credit event--but the press release itself can never be PAI.

I further believe that there is not sufficient PAI at present with which to formulate a correct Credit Event Notice in respect of Marconi.

It is for these reasons that, so far as I am aware, no Credit Event Notice has been served.

Since--barring a miracle--a Restructuring Credit Event will inevitably occur in respect of Marconi plc, the question arises as to why anyone would wish to try and push the dubious concept that a 'Bankruptcy' has occurred at this time. Why not simply wait for a 'Restructuring' to occur? At this point, gentle reader, I leave you to ponder why the timing of a Credit Event would be so crucial to a buyer of credit protection on Marconi when credit-default swap contracts are of a fixed term?


The author's views are personal and should not be construed as representing any opinion other than his own.

  • 23 Sep 2002

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5 UBS 8,763.73 42 6.23%