Credit-default swaps on Irish telecom group Eircom are the latest contracts to be hit by successor woes, after it emerged this week the company's existing debt will be refinanced. The refinancing is a result of BCM Ireland Holdings's takeover of Eircom. If the new debt to be issued by subsidiary BCM Ireland Finance is not deliverable into existing CDS contracts, Eircom protection holders could be holding worthless contracts.
The confusion saw the price of Eircom default protection swoop to 143 basis points Wednesday, 72 bps tighter than the week before and 152 bps from a month prior. This was triggered by players who are long protection/short Eircom bonds exiting positions, traders said.
A surge in corporate take-over activity has highlighted CDS successor problems--also called CDS orphaning--this year (DW, 5/5). The International Swaps and Derivatives Association has been hosting dealer discussions on the issue with a view to drafting a supplement to the 2003 credit derivative definitions which will amend so-called successor language.
