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The International Swaps & Derivatives Association is meeting on Wednesday as a first step in assessing whether a credit event has occurred on Ukraine’s sovereign debt as the country misses payment of a $500 million bond, according to Bloomberg.
The trade group is convening in London to determine whether a moratorium took place in Ukraine, according to a statement on ISDA’s website, Bloomberg reports.
While Ukraine only passed a decree on Tuesday, September 22, to freeze debt payments, the government said last month that the suspension would take place as part of a $18 billion restructuring agreement.
The ISDA decision comes after Ukraine sent Eurobond holders notices yesterday asking them to vote next month on the debt deal reached with a creditor group led by Franklin Templeton, including a 20% writedown in the face value of the bonds. If ISDA votes yes, investors who bought CDS contracts that expired September 20 may be eligible to receive a payout if the bond due on Wednesday isn’t redeemed by the end of the grace period, according to Vadim Khramov, an analyst at Bank of America Merrill Lynch in London.
Read alsoAurelius hedge fund holding Ukraine debt asks better terms"This is being watched quite closely both by investors who bought CDS and banks that sold the contracts" that expired three days ago, Khramov said by phone on Wednesday. "There might be a legal battle over this because it’s a gray area. That’s why today’s decision is important."
In addition to suspending the $500 million bond, Ukraine is missing a $17 million interest payment today on that maturity and a $58 million installment on a security maturing in September, 2020.
Read alsoUkraine bond deal at risk as rebel investors demand change: BloombergThe notes due today dropped 0.4 cent on the dollar to 77.90 cents by 13:42 Kyiv time, trimming a more than 20-cent rally since the restructuring agreement was announced on August 27. The price of insuring the bonds against default with CDS has fallen by about half in that time as the debt deal surpassed market expectations, leaving some CDS holders potentially eligible for smaller payouts than they anticipated.
ISDA yesterday rescheduled its decision on Ukraine "to allow further time to collate information" on the request from an anonymous request dated Sept. 18 to assess if a moratorium has taken place.
Unlike bankruptcy and other credit events that can trigger payouts on credit-default swaps, an event of repudiation or moratorium is a two-part process, according to ISDA’s rules. The first is an evaluation of the potential for default, while the second involves a failure to pay.