Credit default swaps tied to Credit Suisse Group AG subordinated debt are tumbling after a panel ruled that the wipe-out of the Additional Tier 1 notes won’t trigger a payout.
(Bloomberg) — Credit default swaps tied to Credit Suisse Group AG subordinated debt are tumbling after a panel ruled that the wipe-out of the Additional Tier 1 notes won’t trigger a payout.
One-year CDS were indicated at 246 basis points, according to the latest available ICE Data Services prices as of 11:28 a.m. in London, down about 535 basis points from Wednesday. That puts the instruments on course for the biggest drop since March 20 — the day after the rescue deal with UBS Group AG.
Five-year instruments were indicated 92 basis points lower, at 189 basis points.
The Credit Derivatives Determinations Committee ruled at a meeting on Wednesday that the AT1 securities were junior to the subordinated bonds underlying the swaps. That means their write-off in March cannot trigger a payout.
Read more: CDS Panel Says Credit Suisse AT1 Wipeout Won’t Prompt Payout
The cost of insuring against Credit Suisse Group’s subordinated bonds had been rising in the past few weeks. The move was driven by hedge funds including FourSixThree Capital and Diameter Capital Partners piling into the instruments on bets that the panel would rule in favor of a payout.
On the other side, Wall Street banks including Citigroup Inc. and Barclays Plc told clients that a payout was unlikely, while strategists at JPMorgan Chase & Co. wrote on Wednesday that they didn’t believe a so-called credit event has taken place to trigger a payout.
Credit Suisse has subordinated notes left following the AT1 wipeout, and the credit default swaps tied to them remain in place. It’s unclear what will happen to the swaps as the lender gets absorbed by UBS.
The ruling is the latest twist in the Credit Suisse saga. The controversial write-off of the risky AT1 bonds is being challenged by many of its bondholders in court. A Swiss court has recently ordered Swiss regulator Finma to release the decree that allowed for the wipeout.
All 11 members of the CDS panel said they didn’t think a government intervention credit event had occurred that would trigger a payout for the swapholders. Credit Suisse, one of the members of the panel as of April 29, wasn’t part of the deliberations.
The decision also puts the Credit Derivatives Determinations Committee back in the spotlight once again. The panel represents the biggest dealers and traders across the world of credit default swaps, but it’s also in charge of enforcing the market rules.
–With assistance from Olga Voitova and Luca Casiraghi.
(Updates prices in second paragraph, adds context.)
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