Even fundamental changes in any market can have a way of creeping up on you. It is often hard to look back and point to one particular factor or event that marked the turning point. But the resolution last month of a seemingly fairly arcane dispute between bondholders and UK credit-checking firm Experian is being hailed by some as a turning point in the relationship between corporates and the fixed-income market – or, more specifically, corporates and the CDS market – in restructuring disputes. Whether or not this is wildly overstating the case is open to debate, but the episode is a good illustration of how when it comes to any sort of reorganization or restructuring the ground might have shifted beneath many corporates’ feet without them really noticing.
Like any insurance contract, CDS work on the basis that the seller will compensate the buyer against any credit event in the reference entity in return for a regular premium payment. But when that reference entity is subject to a merger, takeover, leveraged buyout or spin-off, things can get difficult as the reference entity might change (or even disappear altogether), possibly rendering the CDS contract worthless.
