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Derivatives

Calpine Sparks Debt Classification Debate

Lawyers and dealers preparing a protocol to settle credit-default swaps referenced to bankrupt U.S. power supplier Calpine are at loggerheads over the eligibility of certain bonds to be delivered under a physical-settlement procedure.

Lawyers and dealers preparing a protocol to settle credit-default swaps referenced to bankrupt U.S. power supplier Calpine are at loggerheads over the eligibility of certain bonds to be delivered under a physical-settlement procedure.

The disagreement centers on some USD1.3 billion contingent convertible notes. One faction in the dispute argues they are unsubordinated, and therefore qualify for physical settlement, but the opposing camp claims the debt is subordinated. "It's chaos here," said one lawyer. "The market it totally split." Typically the indenture classifies the debt instrument, but in this case there is sufficient ambiguity, explained one official close to the debate.

In an effort to quell potential disputes, the International Swaps and Derivatives Association asked law firm WilmerHale to provide opinion on the matter before Calpine filed for bankruptcy late last Tuesday night. WilmerHale advised the notes are not subordinated and therefore qualify for physical settlement, but this opinion did not prevent a debate breaking out. Bettina Siddiqui, spokeswoman for the firm in London, declined comment and partners could not be reached.

Sixteen dealers took part in a series of conference calls last week--three Wednesday and at least one Thursday--to debate the issue, but were unable to break the impasse. Officials fear if dealers don't reach an agreement, a protocol will not be drafted in time for a settlement auction, which must be held within 30 days of the default, a period which includes the Christmas and New Year holidays.

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