This week, the International Swaps and Derivatives Association (ISDA) facilitated an auction held by loan credit default swap index (LCDX) dealers to determine the pricing for the settlement of credit default swaps (CDS) referencing the loans of Hawaiian Telcom Communications, Inc. Earlier this month, Hawaiian Telcom, acquired by private equity firm The Carlyle Group from Verizon Communications in 2005, filed for Chapter 11 bankruptcy protection, thereby triggering required payments of CDS insuring loans of Hawaiian Telcom and the loan-only CDS cash settlement auction. Hawaiian Telcom is one of the 100 reference entities on the LCDX, which references first lien loans.
According to the final results of the auction conducted by Creditex Group Inc. and Markit Group Ltd., sellers of CDS protection will need to pay out 59.875 cents on the dollar. The recovery rate on the CDS settled at 40.125 cents on the dollar, slightly higher than the initial estimate of 39.125 cents on the dollar published earlier in the day.
The auction process and cash settlement based on pricing determined through the auction are built into any Hawaiian Telecom CDS documented with ISDA’s loan-only LCDS and LCDX confirmations. This is different from the recent settlement for CDS referencing some other entities, including Lehman Brothers and Washington Mutual. Parties to Lehman and Washington Mutual CDS had the option, but were not required, to cash settle their CDS contracts based on the auction price. ISDA’s settlement protocols for Lehman and Washington Mutual amended certain CDS contracts to provide for cash rather than physical settlement,
The Hawaiian Telecom auction was conducted in accordance with the LCDS Auction Rules. The auction methodology is largely the same as the methodology for auctions conducted under ISDA’s settlement protocols. As with the protocols, ISDA facilitated the Hawaiian Telecom settlement process by publishing the auction terms, issuing a set of FAQs and providing a complete list of participating bidders prior to the auction.