There are six credit events under the 2003 credit derivatives definitions:
- Obligation Acceleration
- Obligation Default
- Failure to pay
The Bankruptcy credit event could occurs in a number of situations:
- dissolution – the Reference Entity ("RE") is dissolved
- insolvency – the RE (i) becomes insolvent or (ii) unable to pay its debt (iii) fail to pay its debt or (iv) admits its inability in writing
- arrangement with creditors – the RE makes a general assignment, arrangement or composition for the benefit of its creditors
- insolvency proceedings – the RE institutes or has instituted against it a proceedings seeking a judgment of insolvency, bankruptcy or another similar law affecting the rights of creditors, and such proceedings
- winding-up resolution - the RE has a resolution passed for its winding up, official management or liquidation
- appointment of bankruptcy officials – the RE seeks or becomes subject to the appointment of an administrator, provisional liquidator etc over its assets
- enforcement proceedings - the RE has a secured party take possession of or enforcement against substantially all it assets
- similar proceedings – steps or proceedings similar to (a) to (g) above in any jurisdiction has occurred.
The Obligation Acceleration credit event occurs when one or more obligations become due and payable before the scheduled due date following a default (other than non-payment).
A threshold of the Default Requirement i.e. USD10,000,000 or another sum agreed by the parties can be specified in the confirmation to prevent the trigger of credit event for an immaterial default.
Same as Obligation Acceleration but the credit event can occurs when the obligation is capable of being declared due and payable. As a result of its vagueness, this credit event is rarely included.
Failure to Pay
The RE fails to pay an amount after expiration of any applicable Grace Period. Again, a materiality threshold of the Payment Requirement i.e. USD10,000,000 or another sum agreed by the parties can be included.
Repudiation / Moratorium
The Repudiation/Moratorium credit event occurs if an officer of the RE or a government (a) disclaims or repudiates or (b) declares or imposes a moratorium over one or more Obligations of the RE (not less than the Default Requirement) and a Failure to Pay or Restructuring occurs on or before the Repudiation/Moratorium Date
A Restructuring Credit Event occurs when the RE or government agrees with sufficient number of holders of Obligations to:
- reduce the rate or amount of interest
- reduce the amount of principal or premium
- postpone an interest or principal payment date
- change the priority of payment or causing a subordination of the obligation
- change from Permitted Currency
The changes must be in a form which bind all holders and must be announced by the RE or government and the changes must not have been expressly provided for under the terms of the obligations on the Trade Date or the issue date of the obligation.
Section 4.7(b) specifically carves out events such as change to euro, administrative adjustment and changes which do not result from a deterioration in the creditworthiness or financial conditions.
Unless disapplied, the requirement of “Multiple Holder Obligation” will apply which means that the relevant obligation must be held by more than 3 holders that are not affiliates and at least 66.6% of holders must consent to the restructuring under the terms of the obligation.
For the main changes from the 1999 definitions to the 2003 definitions please see this article.
Last updated 27 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.