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A Note on GM and CDS

posted by Stephen Lubben

It is CDS day on the blog.

Both the comments to my prior post and a recent post by Felix Salmon raise the issue of why GM's attempts at an out of court restructuring don't constitute a "restructuring" credit event under the ISDA credit default swap definitions.

I wanted to expand on the quick answer I gave in the comments.

First, workouts could constitute restructurings, but my understanding is that many North American CDS contracts do not contain "restructuring" triggers, because such a trigger requires an affirmative "opt in" under the ISDA settlement matrix (essentially a spreadsheet of default CDS terms).

Second, a restructuring only occurs when "agreed between the Reference Entity . . . and a sufficient number of holders of such Obligation to bind all holders of the Obligation." 2003 ISDA Credit Derivatives Definitions § 4.7 (emphasis mine).  Under the Trust Indenture Act an exchange offer would require 100% consent to constitute a restructuring as so defined -- because a majority can never bind a minority in these situations.  That's what bankrupcy is for.


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