Deutsche Bank has reportedly agreed in principle to pay up on a disputed credit default swap in which it provided protection to UBS on a company that designs and manufactures floors and ceilings. An official close to the situation said UBS will dismiss a lawsuit it brought against Deutsche Bank for failure to pay in the swap after what it thought was the reference company filed for Chapter 11 bankruptcy protection last year. Terms of the settlement had not been finalized by press time, the official said, noting that neither party had yet signed on the dotted line. Spokespersons and officials at Deutsche Bank and UBS declined to comment.
UBS last year thought it agreed to buy from Deutsche Bank five-year credit default protection on Armstrong World Industries, according to court documents obtained by DW. But the trade confirmation it signed listed a different entity, Armstrong Holdings, the parent of Armstrong World Industries, which has no material public debt. When Armstrong World Industries filed for bankruptcy protection last year, UBS tried to exercise the credit default protection. Deutsche Bank's refusal to pay resulted in UBS filing a claim in the High Court in London against Deutsche Bank seeking to enforce the default swap.
Although the reference entity was listed in the confirmation documents as Armstrong Holdings, the signed confirm also listed a reference obligation. The primary obligor for this obligation was listed as Armstrong Holdings, but other details of the obligation was including the CUSIP number, coupon, and maturity, referred to a bond issued by Armstrong World Industries. There was a failure to pay event on this bond, which would have also triggered protection.
According to Stephen Selig, counsel at Baer Marks & Upham, a dispute of this nature is typically resolved by turning first to the contract. If there is not enough information in the contract to determine what was agreed, the court tries to determine the intention of the parties involved. Under New York law, intent likely would have been used to determine what was agreed in this case because of the contractual ambiguity regarding Armstrong Holdings and Armstrong World Industries, he explained. Other lawyers familiar with U.K. law noted that the same reasoning likely would apply in the High Court.
