The proportion of credit events triggered by the restructuring clause in credit-default swaps almost doubled last year. During 2003 and the first two weeks of this year the restructuring clause in credit derivatives was responsible for 24% of all credit events but accounted for only 12.8% of credit events since records began, according to Fitch data. Shin Yukawa, an associate director at the rating agency, attributed the increase to the restructuring of British Energy, which was one of the largest defaults in the European market last year.
After the adoption of the International Swaps and Derivatives Association 2003 credit derivatives definitions the restructuring clause was largely dropped in the U.S. and a modified version--known as modified modified restructuring--became the norm in the European market. The change was largely due to sellers of protection arguing that the restructuring clause was a 'soft' credit event and only objective events, such as failure to pay, should be included.
The bankruptcy clause was responsible for 71.8% of credit events during last year and early this year, compared to 79.7% before and the failure to pay trigger fell to 4.2% from 6.6%.
