Succession Event and Successors
The below notes are merely a summary of the relevant provisions of the Credit Derivatives Definitions (“CDD”) and must be qualified in their entirety by the full provisions thereof.
The successor provisions in the CDD deal with the situation where a Reference Entity (“RE”) is succeeded by another entity, splits into two or more entities or merge with another entity.
If a Successor Event (Section 2.2(b) of the CDD) occurs, namely:
- transfer of assets or liabilities
a Successor will be determined according to the following rules.
It is noteworthy that, under the CDD, it is the transfer of obligations that matters and a change of RE is not triggered by transfer of assets or the occurrence of other corporate events, although the definition of “Succession Event” appears to confine succession to the abovementioned corporate events.
If one entity directly or indirectly succeeds to 75% or more of the Relevant Obligations (“ROs”, discussed below) of the RE, that entity will be the Successor. If one entity (the “1st Entity”) succeeds to more than 25% of the ROs and the RE does not retain more than 25% of the ROs, the 1st Entity will be the Successor.
More than one possible Successor
If there is a transfer of the RE's obligations to more than one entity, there could be more than one Successor under the CDD.
If more than one entity (each a “Succeeding Entity”) succeeds to 25% of the ROs and the RE does not retain more than 25% of the ROs, each Succeeding Entity will be a Successor. If the RE retains more than 25% of the ROs, each Succeeding Entity and the RE will be a Successor. If none of the Succeeding Entity succeeds to more than 25% of the ROs and the RE continues to exist, there will be no Successor Event and the RE will not change. If the RE ceases to exist, the Succeeding Entity with the greatest % of the ROs will be the Successor. If more than one Succeeding Entity shares equal number of ROs, the Succeeding Entity with the greatest % of the obligations of the RE will be the Successor.
If there is more than one Successor, the Credit Derivatives Transaction (“CDT”) will be split into the same number of New Credit Derivatives Transactions (“NCDT”) as there are Successors and each Successor will be the RE of a NCDT. Each NCDT will have the same terms as the original CDT.
75% or more:
|single new RE (Section 2.2(a)(i))|
25% to 75%:
|each entity with over 25% is a RE (Section 2.2(a)(ii) – (iv))|
25% or less
|No change in RE if still in existence (Section 2.2(a)(v)), and if not, the entity with the greatest % will be RE|
In the above notes, an entity can be said to succeed the ROs if:
- the entity assumes or becomes liable for such ROs by operation of law or pursuant to agreement
- the entity issues bonds that are exchanged for the ROs
It should be noted that the RE cannot continue be an obligor (whether primarily or secondarily) e.g. acting as a guarantor of the bonds issued by the entity, otherwise there will be no Succession Event.
ROs are bonds and loans of the RE outstanding immediately prior to the announcement of the Succession Event. The CDD appears to contemplate that announcement will precede the Succession Event and it is not clear whether there would be an issue if the announcement is actually made after the completion of the Succession Event. This issue will become apparent when e.g. a corporate reorganisation is carried out in phases and there is more than one Succession Event.
Substitute Reference Obligation
Please note that if a Reference Obligation has been specified in relation to a CDT and one or more Successors identified do not assume the Reference Obligation, SRO will be determined by the Calculation Agent in accordance with the rules set out in 2.30 of the CDD.
Determination of Successor(s)
The Calculation Agent will be responsible for determining the Successor(s) by referring to Best Available Information (2.2(g) of the CDD) e.g. information filed with regulator or stock exchange or provided to shareholders or creditors. Information that is made available more than 14 days after the Successor Event will not constitute Best Available Information.
Sovereign Reference Entity
The above rules do not apply to a RE which is a Sovereign. In relation to Sovereign RE, Section 2.2(h) of the CDD will instead apply.
Last updated 23 June 2006^
The above notes are intended to provide only general outlines and should be read in conjunction with, and are qualified in their entirety by, the full provisions of the relevant ISDA provisions and definitions. They should never be used in place of professional advice. We accept no responsibility for any loss arising from any action taken or not taken by anyone using this material or using this material in conjunction with any ISDA documentation in reliance thereof.
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