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A long awaited auction to settle credit default swaps referencing telco Altice France (SFR) will take place next week, on Wednesday 27 August, the EMEA Determinations Committee (DC) has said. But in what looks to be a bigger shock announcement, the DC has scrapped the cash settlement provisions it had previously been considering in favour of a ‘composite package’ approach.

The auction being scheduled ends a lengthy wait for CDS market participants, as Altice France triggered a bankruptcy credit event on 27 May — meaning settlement will happen exactly three months later.

But it turns out the DC has had to suddenly fast-track from its previously intended schedule due to a revelation by the company. Aborting the plans it had been working on at this late stage will raise big questions about why there has been so much delay. An immediate consequence is that protection holders and providers will have to quickly get their heads around the DC’s newly unveiled plan to settle CDS post-auction.

The DC’s deliberations had been complicated by the fact that over 95% of Altice France deliverable obligations are subject to a restructuring framework agreement between the company and its creditors, as it notes in its statement. Some obligations are also subject to creditor cooperation agreements. Together this means the vast majority of Altice bonds could face restrictions in transfer to a party not signed up to these agreements, and thus a normal auction process would be heavily impacted along with fair price discovery.

To address these problems to settle Representative Auction-Settled Transactions (RASTs), the DC says it had aimed to develop alternative cash settlement provisions in time to hold an auction in early September — despite having previously claimed it was targeting the second half of July.

The extended September timeline, which the DC did not explicitly mention before in updates, had been on the basis Altice would proceed with its restructuring in October. But on Tuesday (19 August), Altice announced that the last settlement date for transferring deliverable obligations would be 5pm EST on 9 September.

In consequence if any RASTs cannot be delivered (which looks likely to be a lot) they will be settled ‘as soon as practicable’ by delivery of the ‘composite package’ that will result from Altice’s 1 October restructuring — ie the package of instruments that replace the old bonds under Altice France’s ‘Accelerated Safeguard Plan’. The package will comprise cash amounts (cash consideration plus accrued interest), new Altice France notes (the replacement bonds issued under the plan, common equity, and the early bird consent fee, if the original bonds being delivered had it (by including this the DC appears to assume parity of value between these and non-early bird bonds).

“This approach replaces the cash settlement provisions the DC was previously considering,” the DC said.

One complication of that cash settlement fallback approach had been that it built on a work-in-progress by ISDA, which on 3 July had launched a credit derivatives proposal to address lock up agreements for CDS auctions. ISDA’s intention had been for this not to have been applied to live situations, and the feedback period only recently ended, on 8 August. ISDA has been undertaking a review of the DCs since last year and recently unveiled a new governance committee to monitor them.

“The amount of debt that is covered by Lock-Up Agreements can have a disproportionate impact on CDS settlement due to squeezes, perceived squeezes and the interplay of artificial and arbitrary factors such as auction timing and imprecise lock-up data,” said ISDA in launching its 3 July initiative.

The DC notes its new ‘composite package’ approach is not the same as ‘Asset Package Delivery’ under the 2014 Definitions, which does not apply to the transaction type applicable to Altice France (ie Standard European Corporate).

“The critical distinction is that modifications to the Auction Settlement Terms under Section 3.2(d) of the DC Rules is concerned with situations where Physical Settlement would have been applicable to protection buyers had it been the applicable Settlement Method. In other words, the relevant Deliverable Obligation must have survived the occurrence of the Credit Event. By contrast, the Asset Package Delivery provisions only require that a Deliverable Obligation existed prior to the occurrence of the relevant Credit Event.”

This refers to an approach that came in with the 2014 Definitions to deal with CDS referencing financial and sovereign borrowers. One major driver behind this initiative was the need to deal with circumstances of government intervention such as bail-ins for banks, which removed deliverable obligations that otherwise could have been delivered into CDS contracts.

(For interested readers, I recently proposed an approach to deal with asset package delivery for corporate CDS credit events, similar to the overhaul that financials CDS underwent in the 2014 Definitions. It can be found here.)

In between the 27 August auction date for Altice CDS and the borrower’s 1 October restructuring implementation date, there will be a push to physically settle RASTs between 2 and 8 September — ie just before the 9 September deadline set by Altice.

Protection holders must get ahead of this by delivering Notices of Physical Settlement (NOPS) on 28 August — the day after the auction. There is a staggered deadline throughout the day to address the circularity of RAST transfers, with 2pm (London time) for ‘eligible market participants’ delivering to ‘participating bidders’, 4pm for participating bidders delivering to other participating bidders, and 6pm for ‘participating bidders delivering to eligible market participants.

The DC says claims this will reduce the need for participating bidders to subsequently amend their NOPS to reflect the deliverable obligations being delivered to them.

There will be further staggering in physical settlement dates for these three types of transfer, respectively on 2, 4 and 8 September.