Dresdner Bank is suing Bankgesellschaft Berlin because of the latter's refusal to pay out on a credit default swap referenced to Marconi, the troubled telecom company whose restructuring last fall triggered millions of dollars of payouts on credit derivatives protection. Marconi's restructuring highlighted loopholes in credit derivatives documentation, leading to disagreements about what qualifies as a trigger for protection and what can be delivered against a contract. Most of the outstanding contracts on Marconi have been settled, according to dealers and end users, but BGB appears to be one of the last hold outs.
Joseph Carrico, head of the capital markets legal group at BGB, Ron Raffan, director for capital markets structured products at Dresdner, and Donal McCarthy, a spokesman at Dresdner in London, declined comment.
The USD5 million default swap is part of a 100 name synthetic collateralized debt obligation that was privately placed by BGB in 2001, according to a banker familiar with the case. In the transaction, BGB sold protection on Marconi to Dresdner. The dispute is thought to have started over a disagreement between the two firms on whether Marconi's restructuring could be deemed a bankruptcy credit event, but reportedly has moved on to include other matters, including the delivery of assets against the contract.
Although both firms are believed to have entered back-to-back contracts to hedge their Marconi exposure, Dresdner is thought to be heading to court because it has reportedly settled the swap hedging its position with BGB, but the Berlin bank is not prepared to pass this contract through. One possible explanation for the decision is that BGB hedged its position with a monoline insurer that has told the firm it will not settle the contract, according to market participant.
A credit professional said BGB may have teamed up with ACE Guaranty, a monoline that has publicly stated its opposition to classifying Marconi's restructuring as a credit event (DW, 12/1).
Although the court papers have been filed, no trial date has been set and some market participants believe the most likely outcome is an out-of-court settlement away from the glare of media publicity.
Simon Firth, partner at Linklaters, which is representing Dresdner, declined comment. Alex Charlwood, spokesman at BGB's lawyerHerbert Smith in London, also declined comment.
