restructuring

By Abigail Moses Oct. 9 (Bloomberg) — Debt restructurings in Europe may get tougher to complete after creditors that agreed to take part in the reorganization of Thomson SA were hampered in how they can settle credit-default swaps on the debt. Holders of more than 2 billion euros ($3 billion) of Paris- based Thomson debt agreed to help the owner of film processor Technicolor Inc. avert bankruptcy in July. By pledging bonds and loans to the restructuring, investors that insured the securities may now face losses because they can’t use the notes to settle contracts, though they can still settle for cash. Thomson is proving a test case for swap settlements under new protocols aimed at standardizing contracts and curbing risk in the market blamed for aggravating the financial crisis. Investors are concerned creditors that are hedged in the swaps markets won’t participate in reorganizations, which may increase in Europe as Moody’s Investors Service forecasts the corporate default rate will peak at 10.9 percent before year-end. “There’s a risk for people who own the bond and bought protection,” said Michael Hampden-Turner , a credit strategist at Citigroup Inc. in London. “It’s a disincentive for people to agree to restructuring.” Marine Boulot, a spokeswoman for Thomson , declined to comment. The 115-year-old Paris-based company wants to cut 2.8 billion euros of debt through the sale of shares, exchangeable bonds and assets. Bankruptcy Protection Debt restructurings may become more common as banks seek to avoid crystallizing losses by preventing companies from seeking bankruptcy protection. About 23 billion euros of high-yield debt, including buyout loans, was refinanced or extended in the first half, compared with 7 billion euros in the whole of 2008, according to Standard & Poor’s Leveraged Commentary & Data unit. The problems highlighted by the settlement of Thomson swaps may prompt a change in the process, according to Atish Kakodkar , an analyst at independent New York-based research firm CreditSights Inc. Lenders should consider removing restructuring as a credit event that may trigger default swaps, he wrote in a note to investors. “Though Thomson’s settlement is likely to be an operational headache, it has helped to identify some of the shortcomings of the European CDS market, according to Kakodkar. The “complexity and the high degree of uncertainty” could make investors “reluctant to dip their toes” into the market, he wrote. ‘CDS Boogeyman’ Restructuring is not considered a credit event in the U.S., and lawmakers have claimed holders of insurance contracts blocked debt exchanges because they would only be paid out on a bankruptcy. Holders of credit-default swaps will still take part in corporate debt restructurings as long as “they think they have a fair deal,” according to William Porter , head of European credit strategy at Credit Suisse Group AG in London. “The CDS boogeyman view that investors who bought a bond and CDS will block every attempt at restructuring just isn’t true,” he said. Credit-default swaps are privately negotiated financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Investors that can’t collect the full insurance in exchange for bonds are still able to settle for a cash amount determined at auction. A shortage of securities that can be used to settle the swaps may create a price squeeze at the auction, driving the cost of bonds up and the amount paid out on the insurance contracts down. Credit Event The process for triggering credit swaps on Thomson started after traders ruled Aug. 12 that the company’s deferral of payments on $72.5 million of 6.05 percent private notes due this year was a credit event. Investors that three weeks earlier committed their bonds and loans to the company’s debt restructuring may lose money both on their notes and on the credit-default swap contracts. That’s because with so many of the bonds and loans committed to the restructuring, the value of debt that can be used to settle swaps contracts may increase and the amount protection buyers receive may fall. “There will be less incentive to agree to restructurings in the future,” said Teo Lasarte , a credit strategist at Bank of America Merrill Lynch in London. “Going forward, people will be more savvy.” Senior Creditors Thomson Chief Executive Officer Frederic Rose said in July that the money-losing company is negotiating with a minority of senior creditors that didn’t support the proposals. Deutsche Bank AG, which holds 400 million euros of the company’s private notes, was the “most significant,” he said. Stacey Coglan , a Deutsche Bank spokeswoman in London, declined to comment. Credit-default swaps tied to Thomson were quoted at 20 percent upfront and five percent a year at the close of trading yesterday, according to CMA DataVision . That means it costs 2 million euros in advance and 500,000 euros a year to protect 10 million euros of the company’s debt from default for five years. The next test of swap settlement may come from Wind Hellas Telecommunications SA which is seeking to reorganize about 3 billion euros of debt. The third-biggest Greek wireless operator transferred its headquarters to London in August in a move that may be the first step in a restructuring under U.K. law, according to Stephan Haber , a credit analyst at UniCredit SpA in Munich. Upfront Cost Credit-default swaps on subordinated debt sold by Wind Hellas were quoted at 82 percent upfront and 5 percent a year, CMA prices show. Edward Bridges , a London-based spokesman for the company, declined to comment. Buyers of debt protection on Thomson have until Oct. 13 to decide whether to demand payment under their swaps contracts, according to the International Swaps & Derivatives Association a New York-based group that sets standards for the market. The contracts will be settled at three auctions, whose dates are to be determined, ISDA said in a statement on its Web site late yesterday. “Most holders will trigger their contracts and do away with their exposure to Thomson altogether,” Bank of America Merrill Lynch’s Lasarte wrote in a note to investors. “Some protection holders may be inclined to wait for a possible bankruptcy or failure-to-pay down the line in hopes of a better payout.” To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net