Credit derivatives professionals are at loggerheads over whether last week's announcement of Marconi's planned restructuring means that hundreds of millions of dollars of credit protection can be exercised immediately, rather than waiting several months for formal restructuring proceedings to commence. The issue is significant because investors' credit protection could expire in the time between the announcement and the start of proceedings.
Simon Firth, partner at Linklaters in London, said, "In my view there has been a credit event in both Marconi Plc and Marconi Corp. in the steps both companies have taken to agree heads of terms, which will result in a scheme of arrangement." But others disagree, saying that formal steps, such as court proceedings, need to be taken to trigger the contracts.
Firth said the issue of whether credit protection can be triggered now is important because after the restructuring most of the deliverable obligations will be exchanged for cash or equity, making it hard to settle the contracts. However, there is still doubt about the deliverablity of bonds under credit derivative contracts referenced to Marconi Plc, because of a disagreement over whether they count as contingent liabilities (DW, 7/14).
The major credit derivatives desks are relatively flat in their exposure to Marconi and have been expecting a default for several months. One lawyer said, "We don't care what the answer is, we just want an answer." Traders do not expect protection buyers to trigger contracts until there is clarity over these issues. However, if one institution triggers a contract it will start a chain reaction as the protection sellers will have to trigger their hedges, said traders.
Derivatives houses are likely to agree to a consensus based upon the opinion of law firms or what an attorney, such as Robin Potts, predicts would happen in court. Potts declined comment.
