Standard & Poor's recent announcement that it considers Qwest Communications International's recent debt restructuring to be a distressed exchange could trigger credit-default swaps, but protection buyers are holding fire on triggering around USD1 billion (notional) in contracts. If Qwest's action is deemed to be a credit event it would be the first case following an optional restructuring, said market watchers. Traders said as soon as one buyer triggers a contract others will follow suit as most Wall Street players do not have directional positions on the name and will be forced to trigger their hedges as soon as buyers trigger swaps the firms have sold to them. If a seller of protection refuses to pay out a New York or English court will likely rule on the issue.
"Normally the fact that the exchange was optional, not mandatory, would discount any triggering of the protection contract," noted one New York-based credit pro. But S&P's classification of the exchange as distressed gives weight to claims that the company was forced into the decision. The exchange for bonds of longer maturity is also a key point, as this can be seen as extending the maturity, which constitutes a material restructuring under the International Swaps and Derivatives Association documents, added another credit professional.
Qwest completed a debt exchange on Dec. 20, when Qwest Services Corp. issued USD3.3 billion of new notes in exchange for USD5.2 billion of bonds from Qwest Capital Funding, according to a company announcement by the firm. The swap reduced Qwest's debt load by USD1.9 billion, to USD22.6 billion, with many near-term maturities also being extended.
While the exchange clearly demonstrates a deterioration in the credit, the voluntary basis of the contract may rule it out from being classified as a credit event, explained a New York-based credit trader. Particularly striking is the fact that only around 30% of bonds were exchanged and it will be difficult to argue that a debt restructuring was forced when two-thirds of bond holders chose not to make the exchange, he added.
One large disincentive exists, however, against protection holders calling a credit event on Qwest. If the contract is triggered and it is deemed not to be a credit event the holder will lose protection. While protection holders who have trades maturing in the next month may risk this, those that have several years left until their contract expires will likely wait, according to credit pros.
