"Aurelius Capital fails to trigger MBIA CDS payouts
Alea spotted this statement out from ISDA:
It’s from the newfangled ISDA CDS determinations committee, and it refers to an earlier formal request for the committee to ascertain whether CDS written on MBIA - the failed bond insurer - could be said to have been triggered under the terms of a “succession event”. More…
The Mod-r clause in CDS contracts contain provisions whereby the contracts can be triggered by a range of modification or restructuring scenarios beyond the straight-out default of the company.
Had the committee determined that a succession event had occurred, CDS referencing MBIA would have been triggered. In other words, anyone who had bought CDS protection on the bond insurer would be in line for a payout from those who sold protection.
Alas, the ISDA determinations committee has declared there was no succession event under ISDA rules. Which will jar the investor that lodged the determinations request: Austrian hedge fund, Aurelius Capital.In its submission to ISDA, two weeks ago, Aurelius asserted that, by its calculations, “more than 25.7 per cent” of MBIA’s obligations had been succeeded to by MBIA Illinois: at such a level, that would indeed trigger a succession event under ISDA rules. ISDA determines that such an event occurs if more than 25 per cent of “obligations” cede to a new successor entity.
FT Alphaville presumes Aurelius has a CDS position against MBIA (late on a Monday evening, Aurelius could not be reached for comment) - certainly that would explain their activism insofar as doggedly seeking the activation, and arbitration, of the determinations committee.
That being so, will Aurelius seek to appeal the determination decision in court, especially since they are already suing MBIA?
Worth noting seperately: FT Alphaville also understands Aurelius is in a rather uncomfortable position regarding a large CDS contract it entered into with Credit Suisse. Under the contract, Aurelius wrote protection on a basket of structured products, including, but not limited to, CLOs, CDOs and RMBS.