Investment fund Arini Capital Management is fighting the inclusion of senior unsecured bonds belonging to Irish packaging firm Ardagh in a credit-default swap auction, a process which determines the payout for buyers of the default protection.
Arini rejects the idea that the notes issued by Ardagh Packaging Finance Plc can be considered so-called deliverable obligations, according to a statement on Tuesday. The term refers to defaulted debt instruments that can be “delivered” into the auction, and that help set the price.
As one of the largest creditors to Ardagh, Arini has played a major role in the firm’s debt restructuring. It initially sued Ardagh in New York alongside Canyon Partners over an earlier iteration of the overhaul plan, on the grounds that it allegedly benefited insiders. Arini then went on to support the current plan as one of the unsecured lenders that now controls Ardagh after the restructuring.
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According to Arini’s challenge published this week, the senior unsecured notes had no outstanding principal balance when the CDS triggered, and therefore are not eligible as deliverable obligations. At that point, the notes were bound to be exchanged for equity, but the deal was yet to be completed.
Arini has been selling CDS contracts tied to Ardagh Packaging Finance, according to people familiar with the matter, who asked not to be identified discussing private information. That leaves them on the hook for any potential payout.
Arini declined to comment when contacted by Bloomberg.
The inclusion of the senior unsecured notes could increase the chance of a higher payout for buyers of Ardagh Packaging Finance’s CDS, as they increase the number of obligations in the auction and carry a lower value than other bonds. CDS payouts are determined by the difference between the auction price for debt obligations and their face value – so the lower the price, the better the payout.
Ardagh’s restructuring and the treatment of its CDS has been seen as something of a test case for credit market professionals as more and more debt restructuring deals happen outside the courts. Market participants have argued that a wrong move by the panel, which oversees the European CDS market, could undermine the trustworthiness of the default protection and potentially limit the use of the market in the future.
Key to the case is the timing of the so-called credit event – the point at which the protection is triggered. Because the timing and definition of that event wasn’t cemented by a court ruling, but rather through the vaguer, consensual arrangement, nailing down the date it occurred has proved hard.
An external CDS panel eventually decided that the credit event happened by October 7th, before the restructuring went live on November 12th, but after it became contractually binding for all debtholders.
The EMEA determinations committee, which oversees the CDS market in the region, then published an initial list of deliverable obligations on December 19th, which included the senior unsecured notes.
Arini argues that all senior unsecured noteholders were already bound at the time of the credit event by the restructuring agreement and the notes’ collective action clauses to see their holdings equitised even if the actual equitisation had not taken place. That means the notes in question are not eligible, in their view.
Assigning an outstanding principal balance to the securities “would turn them into Schrödinger’s Obligations, existing in two opposite states at once,” the submission said.
Others have taken an opposing view.
In earlier submissions to the panel, lawyers at Milbank argued that the existence of a binding agreement to cause an obligation to convert into equity does not immediately cause its principal to be reduced to zero. The law firm is representing some buyers of the CDS.
Market participants can file challenges to the initial list of deliverable obligations until January 2nd. – Bloomberg