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2014 ISDA Credit Derivatives Definitions
A Jolly Contrarian owner’s manual™
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Section 4.7 in a Nutshell™
Use at your own risk, campers!
Full text of Section 4.7
Section 4.7 Restructuring.
- (a) “Restructuring” means that, with respect to one or more Obligations and in relation to an aggregate amount of not less than the Default Requirement, any one or more of the following events occurs in a form that binds all holders of such Obligation, is agreed between the Reference Entity or a Governmental Authority and a sufficient number of holders of such Obligation to bind all holders of the Obligation or is announced (or otherwise decreed) by the Reference Entity or a Governmental Authority in a form that binds all holders of such Obligation (including, in each case, in respect of Bonds only, by way of an exchange), and such event is not expressly provided for under the terms of such Obligation in effect as of the later of the Credit Event Backstop Date and the date as of which such Obligation is issued or incurred:
- (i) a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals (including by way of redenomination);
- (ii) a reduction in the amount of principal or premium payable at redemption (including by way of redenomination);
- (iii) a postponement or other deferral of a date or dates for either (A) the payment or accrual of interest, or (B) the payment of principal or premium;
- (iv) a change in the ranking in priority of payment of any Obligation, causing the Subordination of such Obligation to any other Obligation; or
- (v) any change in the currency of any payment of interest, principal or premium to any currency other than the lawful currency of Canada, Japan, Switzerland, the United Kingdom and the United States of America and the euro and any successor currency to any of the aforementioned currencies (which in the case of the euro, shall mean the currency which succeeds to and replaces the euro in whole).
- (b) Notwithstanding the provisions of Section 4.7(a), none of the following shall constitute a Restructuring:
- (i) the payment in euros of interest, principal or premium in relation to an Obligation denominated in a currency of a Member State of the European Union that adopts or has adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on European Union;
- (ii) the redenomination from euros into another currency, if (A) the redenomination occurs as a result of action taken by a Governmental Authority of a Member State of the European Union which is of general application in the jurisdiction of such Governmental Authority and (B) a freely available market rate of conversion between euros and such other currency existed at the time of such redenomination and there is no reduction in the rate or amount of interest, principal or premium payable, as determined by reference to such freely available market rate of conversion;
- (iii) the occurrence of, agreement to or announcement of any of the events described in Section 4.7(a)(i) to (v) due to an administrative adjustment, accounting adjustment or tax adjustment or other technical adjustment occurring in the ordinary course of business; and
- (iv) the occurrence of, agreement to or announcement of any of the events described in Sections 4.7(a)(i) to (v) in circumstances where such event does not directly or indirectly result from a deterioration in the creditworthiness or financial condition of the Reference Entity, provided that in respect of Section 4.7(a)(v) only, no such deterioration in the creditworthiness or financial condition of the Reference Entity is required where the redenomination is from euros into another currency and occurs as a result of action taken by a Governmental Authority of a Member State of the European Union which is of general application in the jurisdiction of such Governmental Authority.
- (c) For purposes of Sections 4.7(a), 4.7(b) and 4.10 (Multiple Holder Obligation), the term Obligation shall be deemed to include Underlying Obligations for which the Reference Entity is acting as provider of a Guarantee. In the case of a Guarantee and an Underlying Obligation, references to the Reference Entity in Section 4.7(a) shall be deemed to refer to the Underlying Obligor and the reference to the Reference Entity in Section 4.7(b) shall continue to refer to the Reference Entity.
- (d) If an exchange has occurred, the determination as to whether one of the events described under Sections 4.7(a)(i) to (v) has occurred will be based on a comparison of the terms of the Bond immediately prior to such exchange and the terms of the resulting obligations immediately following such exchange.
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Content and comparisons
Template:M comp disc Credit Derivatives 4.7
Summary
The problem with Restructurings is that while they are often the sort of stunt a failing entity pulls, and can in that case mightily tank the value of an issuer’s senior debt obligations — exactly the contingency credit default swaps are meant to protect against — they are, in their way, not actually defaults, but rather are an accommodation reluctantly agreed to by creditors to stasve off a default — in which case the bonds may therefore recover, even though they never quite live up to their original promise — but sometimes they take place for benign reasons too, unrelated to the deteriorating of the issuer.
Those latter events you don’t want to capture, of course, but in their early attempts to define “Restructuring” ISDA’s crack drafting squad™ repeatedly found it had cast its net too widely.
The answer — always a securities lawyer’s answer, is to go deeper into the weeds and carve in, carve-out, cross-carve until the weeds resemble some Mannerist catacomb. If you think Restructuring is fun, just wait till yuou get a load of Mod R and Mod Mod R.
One fun one was the redenomination of debt obligations issued in, say Deutsche Marks, into euro as a result of European monetary union. So, even though that will never happen again, it is still listed as an excluso from the later versions of Restructuring and is canon in thee 2014 defs.
General discussion
Template:M gen Credit Derivatives 4.7
See also
Template:M sa Credit Derivatives 4.7
References