In the first article of this two-part series on sell-side opportunistic engineering in the CDS market, we surveyed a number of strategies that could be used by sellers of CDS protection to create sell-side gains. In this second part, we analyze two recent situations where a proposed refinancing dramatically affected the CDS market for the reference entity because of the reduction in the sell-side risk. Although these cases may or may not have been driven by CDS considerations, they illustrate how sell-side CDS strategies may be effectively implemented.

Part 1 of this series described the recent decision of the ISDA Americas Determinations Committee to declare that a “failure to pay” had occurred with respect to iHeartCommunications Inc., notwithstanding that the only non-payment had been to a wholly owned subsidiary. The non-payment was orchestrated to avoid a springing lien that would have been triggered had all the notes of a particular issue of iHeartCommunications debt been paid in full. It did not reflect on the creditworthiness of iHeartCommunications.

On May 4, 2015, the Delaware Court of Chancery issued an important decision regarding creditor standing to  maintain a derivative action on behalf of an insolvent corporation. In Quadrant Structured Products Company v. Vertin et al., C.A. No.

5,055 compulsory company liquidations in Q2 2009, but administrations fall 21% on previous quarter

The National Economic Research Associates ("NERA"), an economic consulting firm, demonstrated in a recent article how economic analysis can be used to assess allegations related to credit default swaps ("CDS") and the creditworthiness of a company.

In Quadrant Structured Products Co. v. Vertin, 2015 WL 2062115 (Del. Ch. May 4, 2015), the Delaware Court of Chancery (Vice Chancellor J. Travis Laster) announced a bright-line standard governing the threshold inquiry of when a creditor can maintain a derivative suit against directors for breach of fiduciary duty. The court held that a creditor need only establish that the company was balance sheet insolvent at the time the suit was filed and that the creditor’s standing will not be extinguished if the company rides back into solvency during the litigation.

Yesterday, the Depository Trust & Clearing Corporation (DTCC) announced that its Trade Information Warehouse (TIW) successfully completed on October 21st settlement of the over-the-counter credit default swaps (CDS) related to the credit event of Lehman Brothers Holdings Inc.

In Lehman Brothers Special Financing, Inc. v. Ballyrock ABS CDO 2007-1 Limited (In re Lehman Brothers Holdings, Inc.), Adv. P. No. 09-01032 (JMP) (Bankr. S.D.N.Y. May 12, 2011) [hereinafter “Ballyrock”], the United States Bankruptcy Court for the Southern District of New York held that a contractual provision that subordinates the priority of a termination payment owing under a credit default swap (CDS) to a debtor in bankruptcy, and which caps the amount of the termination payment, may be an unenforceable ipso facto clause under section 541(c)(1)(B).

On Monday, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report entitled “Factors Affecting Efforts to Limit Payments to AIG Counterparties.” The report examines certain transactions related to the rescue of AIG, including the creation of Maiden Lane III, a limited liability company formed last year to facilitate the purchase of assets from counterparties of AIG Financia

On Monday, the International Swaps and Derivatives Association, Inc. (ISDA) announced that it will issue a CDS auction protocol regarding the settlement of credit derivatives that reference Smurfit-Stone Consolidated Enterprise Inc. The protocol is a response to Smurfit-Stone’s recent filing for reorganization under Chapter 11 in the US Bankruptcy Court in Wilmington, Delaware.