October 4, 2017 / 2:08 PM / 17 days ago

Novo Banco tender likely to trigger CDS, analysts say

LONDON, Oct 4 (IFR) - Credit default swaps referencing Portugal’s Novo Banco look set to trigger after the bank waived a minimum participation requirement to complete its €4.74bn bond tender, according to analysts at BNP Paribas.

The liability management exercise saw the issuer tender 57% of total bonds as part of its sale to US investor Lone Star.

“For CDS we believe that a restructuring credit event has now occurred,” said BNPP credit analysts Geoffroy de Pellegars and Marco Busin in a client note.

They believe CDS written under both 2003 and 2014 definitions should now trigger, resulting in an auction of US$300m net notional of contracts to determine payouts.

As of 2pm London time, no question regarding a possible default had been posted on ISDA’s credit determinations committee website.

The BNPP analysts note that 2003 senior CDS should recover at par. Newer 2014 definitions include an asset package recovery mechanism that allows a broader range of obligations to be delivered into the auction, impacting final recovery levels.

“We see a floor for the recovery at 82c with the optionality for higher recovery, should the deposits account be included in the calculation of the recovery of the asset package,” the analysts said.

In 2016, Novo Banco CDS holders were unsuccessful in their attempt to trigger payouts when Bank of Portugal transferred €1.94bn of Novo Banco bonds to “bad bank” Banco Espirito Santo.

The committee of 15 buy- and sell-side firms determined the amount of transferred obligations as insufficient to call a successor event that would have transferred CDS contracts to BES and ultimately triggered as the entity is wound down. (Reporting by Helen Bartholomew)

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