Governmental Intervention - Credit Derivatives Provision

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2014 ISDA Credit Derivatives Definitions

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4.8 in all its glory

Section 4.8 Governmental Intervention.
(a) “Governmental Intervention” 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 as a result of action taken or an announcement made by a Governmental Authority pursuant to, or by means of, a restructuring and resolution law or regulation (or any other similar law or regulation), in each case, applicable to the Reference Entity in a form which is binding, irrespective of whether such event is expressly provided for under the terms of such Obligation:
(i) any event which would affect creditors’ rights so as to cause:
(A) a reduction in the rate or amount of interest payable or the amount of scheduled interest accruals (including by way of redenomination);
(B) a reduction in the amount of principal or premium payable at redemption (including by way of redenomination);
(C) a postponement or other deferral of a date or dates for either (I) the payment or accrual of interest, or (II) the payment of principal or premium; or
(D) a change in the ranking in priority of payment of any Obligation, causing the Subordination of such Obligation to any other Obligation;
(ii) an expropriation, transfer or other event which mandatorily changes the beneficial holder of the Obligation;
(iii) a mandatory cancellation, conversion or exchange; or
(iv) any event which has an analogous effect to any of the events specified in Sections 4.8(a)(i) to (iii).
(b) For purposes of Section 4.8(a), the term Obligation shall be deemed to include Underlying Obligations for which the Reference Entity is acting as provider of a Guarantee.

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Overview

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Not really any great comparisons here: this sort of event would be long since have triggered a Cross Default under an ISDA for example (assuming the Default Requirement triggered the Threshold Amount for a Cross Default — though the Default Requirement would likely be a lot lower — a credit insuitution’s Cross Default threshold would typically be in the order of 3% shareholder equity which, even if distressed, would be higher than the USD10mm fallback amount embedded in a Default Requirement).

Summary

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This is designed to capture ad hoc bail-ins and BRRD action that may be taken to prop up or rescue regulated financial institutions which have fallen upon hard times.

It has lain there harmlessly biding its time for almost a decade — it did get a hit out for Banco Popular in 2017, though the circumstances were fairly straightforward there, as all subordinated debt was written down — but it looks like it is going to be right in the crosshairs when the Credit Suisse AT1 litigation kicks off later in 2023. The Credit Suisse AT1 write-down was confusing enough in itself: once you get to the Prior Deliverable Obligation terms — in play because the official list still listed a long-since matured CS subordinated bond which those responsible had omitted to update — well, we’re in legal eagle heaven.

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  • The JC’s famous Nutshell™ summary of this clause
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  • How all this relates to Credit Suisse and its notorious AT1s
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See also

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References

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