Did Caesars’ Nonpayment Trigger Credit Default Swaps?

To settle the question, the ISDA is convening an external arbitration panel for the first time since 2009.
Katie Kuehner-HebertJanuary 12, 2015
Did Caesars’ Nonpayment Trigger Credit Default Swaps?

An external arbitration panel for the International Swaps and Derivatives Association will convene for the first time since 2009, to determine whether now-expired credit default swaps tied to Caesers Entertainment Corp.’s debt should be triggered, according to a Reuters story Friday.

The latest action comes after the ISDA’s Credit Determinations Committee could not agree.

The sticking point is whether the Las Vegas gaming operator entered into a technical default on its CDS contracts that expired in December when it missed a scheduled $225 million interest payment to a group of junior bondholders.

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The panel will need to determine whether the December CDS contracts should be added to a pool of outstanding CDS contracts expected to trigger in January once Caesars files for bankruptcy, Reuters says. That would result in roughly $1.7 billion in outstanding positions, but the panel would have to decide whether Caesers actually defaulted on the December contracts for them to be included.

A Jan. 5 Law 360 article reported that Caesers is trying to restructure its largest operating unit, Caesars Entertainment Operating Corp., through Chapter 11 as it is “drowning” in $18.4 billion of debt. The company is expected to file for bankruptcy by Jan. 20. Caesers then reportedly wants to split the unit into a real estate investment trust that would own the company’s hotels and casinos, and a separate operating company that would manage the properties. Such a restructuring would also enable Ceasers to lower its debt by $10 billion, Law 360 wrote.

On Monday, Caesars’ junior creditors filed a petition for involuntary Chapter 11 bankruptcy protection due to the $225 million in missed interest payments.

According to Reuters, the decision to convene an external arbitration panel highlights growing concerns that credit default swaps “have begun to unduly influence lender activity,” particularly since Elliott Management, one of Caesars’ largest bondholders, strongly pushed Caesers into a default in December. Ceasers had earlier asserted that Elliott wanted to profit from its outstanding CDS positions, with Elliott countering that Caesers’ restructuring plan represented an “epic and fraudulent scheme,” Reuters wrote.

While ISDA last year overhauled its CDS definitions in an effort to restore confidence in the market after being slammed during the financial crisis, the majority of its rule changes focused on sovereign and financial default determinations rather than corporate entities, according to Reuters.

Source: Reuters