NEW YORK, Jan 9 (IFR) - A failure by ISDA’s Credit Determinations Committee to agree whether Caesars Entertainment entered into a technical default in December has resulted in the convening of an external arbitration panel for the first time in six years, and has added to concerns that credit default swaps have begun to unduly influence lender activity.
A three-member external panel is currently being selected by ISDA’s 15-strong DC.
On Thursday, four people were nominated as potential candidates to hear the Caesars case - Kimberly Summe, general counsel at Partner Fund Management, Rick Grove, CEO of advisory firm Rutter Associates, Columbia Law professor David Schizer, and Cornell Law professor Charles Whitehead.
Market participants have until close of business on Monday to nominate other candidates.
The panel will consider whether now-expired credit default swaps tied to the company’s debt should be triggered, after the Committee was unable to come to a super-majority regarding whether Caesars fulfilled a December 15 payment obligation.
The last such panel was convened in 2009 to resolve questions around Mexico’s Cemex.
The arbitration judgement - for which there is currently no timetable - will determine whether CDS contracts that expired in December will be added to a pool of outstanding CDS contracts expected to trigger in January once Caesars files for bankruptcy, as is planned.
That filing would trigger US$1.68bn notional in outstanding contracts, according to data from the Depository Trust & Clearing Corporation, but would not include contracts expired in December without arbiter affirmation of earlier default.
The disagreement reignited concerns around lender impropriety after one of Caesars’ largest bondholders - Elliott Management - pushed hard for the gaming operator to be forced into a default in December. Caesars had previously accused Elliott of trying to force a default in order to profit from outstanding CDS positions.
“Elliott appears to have the greatest ulterior motive in seeing that defaults rather than survives and thrives,” wrote the company as part of a lawsuit that got under way last summer.
Highlighting the complex and intertwined web of credit market participants, Elliott is also one of the 15 voting members on ISDA’s DC. Elliott was among five firms that voted in favour of a default - along with PIMCO, Goldman Sachs, Citigroup and Morgan Stanley - while the other 10 voted against.
Elliott responded to Caesars’ lawsuit with one of its own in November, alleging that the gaming company’s restructuring plan represented an “epic and fraudulent scheme”.
With the January Chapter 11 filing all but set in stone, the focus now turns to whether the arbiters will include the December-expiry contracts in the resulting credit auction that will determine the final payout on protection.
The request that December contracts be included was submitted anonymously as per ISDA rules, and participants did not implicate Elliott specifically. An Elliott spokesperson declined to comment.
The controversy highlights an unsettling prospect that has now been alleged at least three times in the past two years - that corporate lenders are structuring and negotiating agreements based on their CDS positions.
Last month, a question submitted regarding the possibility of a RadioShack default included an accusation that loans made to the retailer were structured to avoid triggering the just-expired December contract, in order that the lender could avoid losses on a short CDS position.
In 2013, a lending agreement handed to Spanish gaming firm Codere was pushed two days beyond the expiry of a CDS contract, raising similar concerns.
Neither accusation has led to any formal action, but such worries come at a crucial time for the CDS market. Industry leaders had dared to hope that the market had finally shed the black-sheep status it had gained from its ill-perceived role in the financial crisis.
ISDA just last year implemented a sweeping overhaul of CDS definitions aimed at restoring confidence in the market, but the majority of rules focused on sovereign and financial default determinations rather than corporate entities. (Reporting by Mike Kentz; Editing by Helen Bartholomew and Matthew Davies)