Noble default-swap verdict in play as test of ISDA system

The company logo of Noble Group is displayed at its office in Hong Kong, China on Jan 22, 2016.
The company logo of Noble Group is displayed at its office in Hong Kong, China on Jan 22, 2016. PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Pressure is building on an International Swaps & Derivatives Association panel of investors and bankers to end Noble Group's credit-default swap impasse.

ISDA's determinations committee will meet on Wednesday (Sept 6) to reconsider whether Noble triggered a credit event - the precondition for a payout on CDS contracts - when it arranged a 120-day extension to a loan facility in June. Once Asia's largest commodity trader, Noble is now fighting for survival more than two years into a crisis marked by accounting criticisms, a plunge in its securities and credit-rating downgrades.

In an unprecedented decision on Aug 9, the ISDA committee said it didn't have enough information to decide either way on the CDS, spurring a flurry of activity as holders of the contracts demanded payment directly from sellers. Then, the panel put a stop to that, suspending any bilateral payouts on Noble while it reassessed the credit event question.

Market watchers say the decision by the panel this time around has greater significance than the net US$157 million of outstanding default swaps on Noble suggests. Following the financial crisis, market participants established the determinations committee system so CDS buyers and sellers would have greater certainty about credit events.

"If the determinations committee still decides to not have enough information in the Wednesday meeting, it will shake investors' confidence in the DC's ability to make decisions," said Kingsley Ong, a partner in Hong Kong at law firm Eversheds Sutherland, who specializes in debt restructuring. "There is lots of pressure on the DC this week."

ISDA posted on its blog last week that it "acts as secretary to the DCs and administers the process" but it doesn't have a vote or make decisions on questions, after citing market confusion and frustration on the Noble deliberations.

In at least four meetings since June 22 leading up to the dismissal in August, the DC was unable to make a decision on Noble CDS as it sought more information. On Aug 30, the committee voted unanimously to halt the settlements on the contracts.

"The CDS market has changed a lot since the global financial crisis in terms of definitions for credit events," said Sean Chang, head of Asian debt investment at Baring Asset Management (Asia) Ltd in Hong Kong. "But in certain regions, they are still not very clear cut, which leads to confusion and disputes. The failure to make a rule on a high-profile case will certainly hurt confidence of CDS investors."

JPMorgan Chase & Co restarted the debate in August when it asked the committee to reconsider if a credit event has occurred with regard to Noble.

Separately, BNP Paribas asked last month if a credit event notice would be valid without supporting documentation or evidence, and whether it's necessary for a buyer to provide them. The French bank asked the panel to resolve its questions "so that market stability and integrity and safe and efficient derivatives markets can be maintained."

ISDA determinations committees each comprise of 10 sell-side and five buy-side voting firms, along with three consultative firms and central counterparty observer members, according to the its website.

"Over the years every new modification to the CDS product has in part been an attempt to commoditize it," said Ray Wepener, an executive director at Haitong International Securities Group in Hong Kong. "Complications like this related to the Noble Group case don't help."

Noble's chairman Paul Brough said on Tuesday it expects to find a buyer for its oil business by the end of September and get an extension on its covenant waivers beyond October, but conditions are still very difficult.

Outstanding CDS contracts related to Noble, or the gross notional amount including buys and sells, fell to US$1.21 billion on July 28 from US$1.65 billion at the start of the year, according to the latest ISDA data.

Price volatility in settling CDS contracts "combined with uncertainty of the DC's determination will increase the risks for market players," according to Ong at Eversheds.