The International Swaps and Derivatives Association will hold two auctions to cash settle credit default swaps referencing Dura Operating Corp.'s senior and subordinated bonds. The separate auctions reflect the big difference in estimated recovery values of the notes. Market participants have between Nov. 8 and Nov. 17 to adhere to the protocol, which for the first time will include single name trades, and the auction to determine recovery values will be held Nov. 28. Collins & Aikman, ISDA's first cash settlement protocol, is the only other protocol to include separate auctions for senior and subordinated debt.
The inclusion of single-name CDS is expected to encourage more participants to sign up to cash settlement compared to previous protocols. "The one thing that held the buyside back was there was no inclusion of single names. This time they are included," said a source. Previous protocols have only included index and tranche trades. An ISDA spokeswoman said recovery lock credit derivative transactions will also be included in the protocol. Market participants have the option to cash settle or psychically settle the CDS trades, but most are expected to cash settle.
Creditex and Markit will administer the auction of Dura's senior 8 5/8% '12 and subordinated 9% '09 notes. The '12 bonds fell four points to 29, while the '09 notes rose three-quarters of a point to 7 3/4 after the auto supplier's U.S. and Canadian subsidiaries filed for bankruptcy protection with the U.S. Bankruptcy Court for the District of Delaware Oct. 30. A trader said there was a slight short squeeze on Dura's subordinated bonds as CDS buyers sought to buy bonds to deliver into CDS contracts. There is more CDS outstanding on the '09 notes compared to the senior notes because they traded in CDX high-yield indices, said the source.
ISDA completed an off-the-shelf CDS settlement procedure in September. At the time, market participants anticipated Dura would most likely be the first credit for which the protocol would be used (CIN, 9/11).
In a report, KDP Investment Advisors estimates the future value of Dura's senior notes will be in the 41-50 range. This assumes the company's pension plan is terminated and a claim is staked by the Pension Benefit Guaranty Corporation, which would dilute the unsecured claims in a workout. KDP lowered its recovery from the 50-59 range given the lower third quarter performance of other auto suppliers.
A Dura spokeswoman said it is too early to tell what recoveries creditors can expect from Dura's reorganization. She had no comment on the trading of the company's securities.
