The likely demerger of Six Continents has highlighted a hole in the International Swaps and Derivatives Association's 2003 credit derivatives definitions and lawyers are calling for the association to start work on a supplement. Derivatives professionals want to clarify the successor language so that when a company changes its corporate structure the transfer of obligations includes debt that is refinanced, and not just shifted around.
The language in the 2003 credit definitions, which is the same as a 2001 supplement, gives six scenarios and outcomes covering what dealers and lawyers thought would be every eventuality, but it does not cover the refinancing of debt.
"Dealers are pushing to have this put on the top of the ISDA agenda," said one lawyer. There are approximately USD300 million (notional) in outstanding credit-default swaps on Six Continents, said one dealer. The contracts will be in place on the original entity, even if it is demerged. "It still has some debt outstanding, but its not an ideal reference entity," said another lawyer.
Lawyers said ISDA has not made a statement regarding the issue. Louise Marshall, policy director at ISDA in New York, was travelling and did not return calls.