Credit-default swaps written on the debt of Japan Airlines Corp may be the first to be auctioned in the country, said Hisayoshi Nogawa, a structured credit strategist at BNP Paribas Securities Japan.
“An extraordinary Diet session starts today [yesterday] and the revitalization plan framework will be decided,” Nogawa said in a phone interview from Tokyo. “Then the write-off will be set, which will qualify as a restructuring credit event, meaning Japan’s first CDS auction will take place.”
Tokyo-based Japan Air sought government support and asked banks to write off or convert into equity debts totaling ¥250 billion (US$2.7 billion) as it battles to avoid collapse, a person familiar with the situation said. Japanese Prime Minister Yukio Hatoyama will make the final decision on whether to grant the carrier a state bailout, its fourth since 2001, Japanese Transport Minister Seiji Maehara said on Friday.
Once Japan Air confirms it has deferred a debt repayment, a committee of the New York-based International Swaps & Derivatives Association may be asked to rule that a so-called restructuring credit event has taken place, Nogawa said. Should the committee decide that a credit event has occurred, an auction to help settle credit-default swaps on the airline’s debt would follow, he said.
Swaps protecting Japan Air’s bonds for five years were last quoted at 2,700 basis points by BNP Paribas.
The contracts are privately negotiated financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt or to hedge against losses.
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