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KIRIAKOS TOBRAS 2 2012 CDS ID CODE GUIDE : How to read a CDS

CDS ID CODE GUIDE

CDS Market & Debt Restructuring

Restructuring is a credit event used in many credit derivatives. It can be triggered when a reference entity restructures its debt.

Three main definitions of restructuring are used: 1. restructuring (old R), 2. modified restructuring (mod R) and 3. modified modified restructuring (mod mod R).
In addition, credit default swaps written on high yield corporates are usually documented without restructuring.

CDS ID Restructuring Guide

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Old R
The popular name for restructuring as defined in the 1999 credit derivative definitions. This allows the credit event to be triggered when a debt obligation is restructured, for example, by having interest payments reduced, having its principal amount reduced, having its maturity extended, becoming subordinated to another obligation or having its currency changed. There is no maturity limitation on the kind of obligations that can be delivered following this version of restructuring. Old R is currently used for most emerging market credit default swaps as well as for Japanese credits.

Modified restructuring (mod R)

A form of the restructuring credit event used for credit default swaps written on North American and Australian investment grade corporates and financials. The credit event is referred to in credit derivatives documentation as restructuring maturity limitation and fully transferable obligation. In trades documented using mod R, which was introduced in 2001, a credit event can be triggered by the same events as for old R. However, unlike with old R, not all obligations can be delivered following the credit event. Under mod R, obligations with a maturity beyond a certain date cannot be delivered. The date, known as the restructuring maturity limitation date, is defined as the earlier of the
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longest maturity of any restructured bond or loan and 30 months after the restructuring takes place. The maturity limitation feature is designed to reduce the protection buyers option to deliver long-dated bonds that may be trading at a discount to shorter dated debt. The other main feature of mod R is that deliverable obligations must be fully transferable. That is, there must be no restrictions on the type of investors that can hold the obligations, and there must be no requirement for the issuer to give approval for an investor to buy its obligations. (In a distressed situation, a company often prefers its liabilities to be held by passive or sympathetic investors rather than aggressive value investors such as distressed debt hedge funds.) This feature is included because obligations that are less than fully transferable are likely to trade at a discount to those that have full rights attached.

Modified Modified restructing (mod mod R)

A form of the restructuring credit event used for credit default swaps written on European corporates and financials. The credit event is referred to in credit derivatives documentation as modified restructuring maturity limitation and conditionally transferable obligation. It is similar to modified restructuring, but has two important differences. First, the restructuring maturity limitation date is set at 60 rather than 30 months after the restructuring. Second, whereas mod R requires a deliverable obligation to be fully transferable, mod mod R allows obligations to be delivered so long as they are conditionally transferable. This wider definition of transferability allows even so-called consent-required loans to be deliverable obligations provided they include language stating that consent may not be unreasonably withheld or delayed. This is especially relevant for European loans, which often have clauses preventing transfer without the borrowers consent.

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Dr. KIRIAKOS TOBRAS 2 2012 CDS ID CODE GUIDE : How to read a CDS

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Dr. KIRIAKOS TOBRAS 2 2012 CDS ID CODE GUIDE : How to read a CDS

CDS Market & Debt Class

CDS ID Debt Class Guide

Senior Debt
A Senior Debt is frequently issued in the form of senior notes or referred to as senior loans, is debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer. Senior debt has greater seniority in the issuer's capital structure than subordinated debt. In the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment. Senior debt is often secured by collateral on which the lender has put in place a first lien. Usually this covers all the assets of a corporation and is often used for revolving credit lines. It is the debt that has priority for repayment in a liquidation. It is a class of corporate debt that has priority with respect to interest and principal over other classes of debt and over all classes of equity by the same issuer.

Subordinated Debt
Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debt holders receive payment only after senior debt claims are paid in full. Subordinated debt generally refers to debt securities that have a secondary or lesser claim to the issuer's assets than more senior debt, should the issuer default on its obligations. In fact, there are also levels of subordinated debt, with senior subordinated debt having a higher claim to repayment than junior subordinated debt.

Junior Debt
A class of debt that, in the event of insolvency, is prioritized lower than other classes of debt. The most common kind of junior debt is an unsecured loan, which has no collateral.
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Another kind of junior debt is a secured loan in which another loan has priority on the collateral; a second mortgage is an example of a secured junior debt. This class of debt carries higher risk but also pays higher interest than other classes.

Second lien and first lien secured loans

In the event of a bankruptcy or liquidation, the assets used by the company as security would first be provided to the first lien secured lenders as repayment of their borrowings. To the extent that the value of the assets is sufficient to satisfy the company's obligations to the first lien secured lenders, any additional proceeds from the sale of the pledged assets would then be made available to the second lien lenders as repayment of the second lien loan. With almost no exceptions, a borrower will take a second lien loan either at the same time or after taking a traditional first lien secured loan and the secured lenders will place limitations on the borrower's ability to pledge its assets or borrow additional secured debt. The specific rights of the first lien and second lien lenders are established in the credit agreements between the borrower and each class of lender as well as in an intercreditor agreement. As the name implies, an intercreditor agreement is a contract between multiple classes of lenders where each class of lender agrees to specific procedures and preferences in the event of a bankruptcy or liquidation. Secured lenders will routinely require an intercreditor agreement to protect their interests before allowing a borrower to obtain a second lien loan.

Second lien and unsecured debt

Unlike unsecured debt, second lien loans receive a pledge of specific assets of the borrower (e.g., buildings, land, equipment, intellectual property, receivables and other financial assets).

Second lien and subordinated debt

Subordinated debt refers to a class of obligations that are contractually subordinated in ranking to all of the senior obligations (i.e., general non-subordinated obligations) of the company, whether they are secured or unsecured. Although the second lien loan's security interest is subordinated to the first lien loan's interest in the pledged assets of the company, the ranking of first lien and second lien loans are the same in the event the pledged assets are not sufficient to satisfy the outstanding borrowings. By way of illustration, in the event of a liquidation of a company, both the first lien and second lien loans would likely be repaid in full (along with trade and other general creditors) before the subordinated lenders receive any repayment of their obligations.

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