Dealers held the credit event auction for Portugal Telecom International Finance on Thursday, returning a final price of 20. This implied an 80 point loss for counterparties who had sold CDS protection on the name.
Seven bonds were deliverable into the auction, with the International Swaps and Derivatives Association’s Determinations Committee having included June 20-terminating PorTel contracts in those triggered by the bankruptcy filing of its Brazilian parent firm Oi.
PorTel five year CDS had been quoted at 85 points up front at one stage earlier this month, implying a 15% recovery was likely, but this had improved to 81 points up front by the time of the auction. PorTel bonds had likewise climbed from 15 cents each to around 19. The name traded at less than 500bp a year ago, but began widening sharply in the second half of 2015.
10 dealers provided initial markets for the auction, resulting in an initial market midpoint of 19.375. Citi submitted the highest valuation, with a 19.5 bid and 21.5 offer. Merrill Lynch’s was the lowest, at 17.625/19.625.
Among physical settlement requests there was €86.2m interest to sell. Four banks offered amounts but by far the biggest offer came from Goldman Sachs, at €148.95m. There were two bidding banks, JP Morgan and Morgan Stanley, with €52.95m and €17.8m respectively.
A greater weight of offers to bids often causes the final price of a credit event auction to be lower than the initial market midpoint. Conversely, a greater level of bids can raise the final price. The final price of PorTel CDS went against this tendency, however.
There were €86.2m of limit order trades. Seven limit orders were wholly filled, with five of those bid at 20.375 and two at 20.175. BNP Paribas, Citi, Credit Suisse and Goldman Sachs partially filled limit orders at 20, setting the final price.
ISDA’s DC agreed unanimously on July 1 that a bankruptcy credit event had been triggered on Portugal Telecom International Finance. The DC had accepted a question on the bankruptcy trigger in late June, after Portugal Telecom’s Brazilian parent company Oi filed for bankruptcy protection on nearly $20bn worth of debt having failed to reach a restructuring agreement with creditors.
The PorTel credit event auction combined settlement of updated 2003 transactions and 2014 transactions. The DC opted for this procedure on the basis that the deliverable obligations for each set of transactions were identical.
The shortest dated of the seven deliverable bonds was the €400m 6.25% July 2016, while the longest maturity deliverable was the €500m 4.5% June 2025. Auction results are influenced by which bonds are cheapest to deliver, but all of Portugal Telecom International Finance’s deliverable bonds were quoted at similar levels.
According to data from the Depository Trust & Clearing Corporation, in the week ending June 24 there was $12.95bn of gross notional CDS referencing Portugal Telecom International Finance, with $921.4m equivalent net notional.
Set up in 1998, Portugal Telecom International Finance provides finance for PT Portugal. Since June last year, PT Portugal has been wholly owned by Altice, after Oi sold off its Portuguese assets to cut debt. Portugal Telecom and Oi said in October 2013 that they would combine to form a Brazil based group.
