Swiss ReSwiss Re Financial Products ISDA Luncheon November 9, 2001 (i) The Impact of September 11 on...

Swiss Re Swiss Re Financial Products

ISDA Luncheon

November 9, 2001

(i) The Impact of September 11 on the Credit Markets

(ii) Recent Changes to the Credit Derivatives Documentation

Swiss Re Swiss Re Financial Products2

Particularly Volatile Industry Sectors

• Airlines

• Leisure/Travel

• Lodging

• Retail

• Automobile

• Insurance

• Investment Banking


Reaction to September 11 Events

• Credit spread widening

• Widening of bid/offer spreads

• Notional per trade dropped

• Discontinuous moves in default premiums

• Counterparty credit exposure closely monitored

– Increased correlation concerns

• Reduced appetite for non-standard structures


Reasons for Credit Spread Widening

• Weakening economy

• September 11 attacks

• Rating agency activity

• New issue flow

• Softened by

– Rate cuts

– Relatively stable equity markets


5y Default Premium British Airways Plc

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10/26/01

Bid

Offer

Airlines: British Airways Plc


Rating action:

• Moody’s:

– Sep 17: Negative watch (A3)

– Oct 12: Cut to Baa3, negative outlook

• S&P:

– Sep 13: Negative watch (BBB+)

– Oct 16: Cut to BBB-, negative watch

Airlines: British Airways Plc (cont.)

Baa3 (negative) / BBB- (watch -)


Lodging: Hilton Hotels Corp.

5y Default Premium Hilton Hotels Corp.

100

200

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700

8/31/01

9/7/01

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10/26/01

Bid

Offer


Lodging: Hilton Hotels Corp. (cont.)

Baa3 (watch -) / BBB- (watch -)

Rating action:

• Moody’s:

– Sep 25: Negative watch (Baa3)

• S&P:

– Sep 21: Negative watch (BBB-)


Retail: The Gap, Inc.

5y Default Premium The Gap, Inc.

60

90

120

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270

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10/26/01


Retail: The Gap, Inc. (cont.)Baa2 (negative) / BBB+ (stable)

Rating action:

• Moody’s:

– Oct 12: Negative watch (A3)

– Oct 29: Cut to Baa2, negative outlook

• S&P:

– Oct 29: Cut 2 notches to BBB+, stable


Autos: Ford Motor Credit Company

5y Default Premium Ford Motor Credit Company

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Autos: Ford Motor Credit Company (cont.)

A2 (negative) / BBB+ (stable)Rating action:

• Moody’s:

– Aug 17: Negative watch (A2)

– Oct 18: Removed from negative watch; Ford Motor Company cut to A3 and P-2 (short-term)

• S&P:

– Aug 17: Negative watch (A)

– Oct 15: Cut to BBB+, A-2 (short-term)


Autos: Ford Motor Credit Company (cont.)

Debt offerings:

• Oct 25: Ford sells $9.4 billion global debt

– 2y + 3y floaters, 5y, 10y + 30y bonds

• Oct 26: GMAC sells $6 billion 10y + 30y bonds

• Increased utilization of alternative financing

– Asset-backed market


Insurance: AXA S.A.

5y Default Premium AXA S.A.

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Insurance: AXA S.A. (cont.)A1 / A+ (stable)

Rating action:

• None


Brokers: Lehman Brothers Holdings Inc.

5y Default Premium Lehman Brothers Holdings Inc.

40

50

60

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100

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Brokers: Lehman Brothers Holdings Inc. (cont.)

A2 (stable) / A (stable)

Rating action:

• None


Telecom: AT&T Corporation

5y Default Premium AT&T Corporation

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Telecom: AT&T Corporation (cont.)A3 (watch -) / A- (watch -)

Rating action:

• Moody’s:

– Oct 25: Cut to A3, negative watch

• S&P:

– Oct 29: Cut to A-, negative watch

– Nov 9: $5 billion issue rated BBB+

– Expected to belong to AT&T Communications Services, Inc.


Photo Equipment: Eastman Kodak Company

5y Default Premium Eastman Kodak Company

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Photo Equipment: Eastman Kodak Company (cont.)

A3 (watch -) / A- (stable)

Rating action:

• Moody’s:

– Oct 30: Cut to A3, negative watch

• S&P:

– July 23: Negative watch (A+)

– Oct 25: Cut 2 notches to A-, stable outlook


(ii) Changes to the Credit Derivatives Documentation

• Zero Coupon Bonds and Convertible Bonds as Deliverable Obligations

• Bankruptcy Credit Event

• Currency of Payment

• Publicly Available Information

• Successor


Changes to the Credit Derivatives Documentation

(cont.)

• Clarification about Guaranteed Obligations

• Recommendations about

– Obligation Default / Obligation Acceleration

– Repudiation / Moratorium


Zero Coupon Bonds and Convertible Bonds as Deliverable Obligations

• Section 2.18(b)(vii), Not Contingent

• ... any obligation

– (A) the payment or repayment of principal of which is not in an amount determined by reference to any formula or index, or which is not subject to any contingency

– (B) which bears interest at either a fixed or floating rate that is paid on a periodic basis and ...



(cont.)

• Section 2.18(b)(vii), Not Contingent, rules out

• Zero bonds

• But does not exclude non-zero convertible bonds

– if they are convertible at the option

– of the bond holder

– of their trustee acting for their benefits



(cont.)

• Amend Section 2.18(b)(vii)

• Accreting language

– Accreted Amount

– Original issue price plus

– Balance between issue price and payment at maturity


Bankruptcy Credit Event

• Amend Section 4.2(b)

– ... fails or admits in writing in a judicial, regulatory or administrative proceeding or filing its inability generally to pay its debts as they become due;

• Addresses concerns that any broad statement about financial difficulties may trigger a default swap


Bankruptcy Credit Event (cont.)

• Amend Section 4.2(i)

• Delete

– or (i) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts


Currency of Payment

• Section 4.7, Restructuring

• Replace 4.7(a)(v)

– Restructuring means ... (v) any change in the currency or composition of any payment of interest or principal

• Permitted Currency

– G7 countries

– OECD countries that are rated AAA by at least one of Moody’s, S&P and Fitch


Publicly Available Information

• Section 3.5

• Information contained in any

– judicial, administrative or regulatory filing or proceeding

• should constitute Publicly Available Information

• Filings with the SEC

• Present language may not allow usage of filings unless reported in public source


Successor Definition

• Section 2.2 Successor (current version)

– ... a direct or indirect successor to a Reference Entity that assumes all or substantially all of the obligations thereof by way of merger, consolidation, ...

• Existing default swap will be split up in case of several successors

– Based on thresholds 75% and 25%

– > 75%: 1 successor

– 25% <= X < 75%: Split up trade in pieces of equal size

– < 25%: Original entity or new “largest” entity


Contact

Hilmar Schaumann

[email protected]

Tel. 212-317 5572

Swiss Re Financial Products Corporation

55 East 52nd Street, 41st Floor

New York, NY 10055

Swiss ReSwiss Re Financial Products ISDA Luncheon November 9, 2001 (i) The Impact of September 11 on...

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