The Credit Derivatives Determinations Committee has ruled that credit default swaps on Ukraine have triggered in the wake of Kyiv striking a deal with its creditors to suspend sovereign debt payments.
The unanimous decision from the 13-member industry body was published on Friday afternoon, confirming CDS watchers' expectations of a far more clear-cut affair compared with the protracted deliberations over Russia CDS contracts.
Russia CDS was deemed to have triggered over two months ago after Moscow failed to make some small interest payments on its external debt, but the contracts have still not been settled as the Determinations Committee has sought (and secured) a temporary sanctions waiver to trade Russian securities that would allow a CDS auction to take place.
There should be no such problems for Ukraine CDS now that a restructuring credit event has been triggered. That is because there are no restraints on banks trading Ukraine’s hard currency debt – a crucial part of the auction mechanism used to determine payouts to protection holders.
A question over Ukraine CDS was posed to the Committee a few days after Kyiv won some much-needed breathing space on its finances. Investors have agreed to defer payments on nearly US$20bn in face value of foreign currency bonds for two years from August 1. Separately, Ukraine also received backing to delay payments on its US$3.2bn GDP-linked warrants and lower the amount of GDP-related repayments.
The Committee judged that the agreement with investors met the criteria for a “restructuring credit event”, which will trigger payouts on the US$227m of Ukraine CDS that the Depository Trust & Clearing Corp says is still outstanding in the market. A CDS auction should now be used to establish the value of Ukraine’s foreign currency debt, which in turn is used to calculate CDS payouts that aim to compensate for bondholder losses.
Trading volumes in Ukraine hard currency debt have dropped during the quieter summer period, but are still averaging about US$320m a week since early July, according to data from MarketAxess. Ukraine’s 7.75% September 2024 bonds were bid at 33% of face value last week, according to Refinitiv, giving an indication of the potential scale of CDS payouts.
Hard to know
The decision on Ukraine CDS comes at a time when the Committee continues to explore how best to settle Russia CDS. Experts say there is still no guarantee an auction would function properly given the limited window in which US firms will be able to trade Russian debt without fear of contravening the sanctions.
“The CDS auction is built on the theory that you have an efficient market. It’s obvious that we don’t have that in the case of Russia [because of the sanctions banning trading of Russian securities]," said John Williams, a partner with law firm Milbank, who helped create much of the modern CDS market architecture.
"I don’t recall the market facing a situation like this before – it’s pretty tough to design an auction for. So I think it’s hard to know how market participants will behave in this case," he added.
*updates to reflect ruling on Ukraine CDS