What does the CDS market have in common with a toddler?

Receive free Casino Guichard-Perrachon SA updates

We’ll send you a myFT Daily Digest email rounding up the latest Casino Guichard-Perrachon SA news every morning.

People seem very, very interested in whether French supermarket Casino has triggered payouts on its credit-default swaps.

It has not, according to the Determinations Committee, the finance-industry group that’s in charge of these types of matters. The committee decided that on June 2. Then it decided again on June 8. And August 2. Then it said no four additional times, on August 4.

In fact, the DC has received at least eight questions asking, more or less directly, whether Casino’s debt struggles have prompted a Credit Event that would lead to payouts for holders of its CDS. For comparison’s sake, the committee has fielded only five questions about Credit Suisse AG, which no longer exists independently.

Casino still exists, of course. It’s not as healthy as Hovnanian, whose Credit Event made a bunch of people really mad and sparked responses from regulators. Still, in July the French supermarket chain got a lifeline from Czech billionaire Daniel Křetínský after it was pushed into negotiations with creditors, as mainFT has covered.

CreditSights analysts are even bullish on Casino’s senior term loans. They argue that the unsecured bondholders will have trouble challenging the current restructuring plan to boost those bonds’ recoveries, which the analysts have described as “de minimis”.

Given all of that, these Credit Event questions seem pretty persistent!

It’s happening during a resurgence of activity in the CDS market. And we all know what that means: financial engineering, or at least paranoia about it. The concerns are usually along the lines of the Hovnanian situation, meaning that creditors and/or companies could threaten a strategic default as a bargaining chip with creditors. We suppose it is also possible for a company to push for DC rulings to show it hasn’t created an Event of Default, or for a disgruntled class of creditors who own CDS to try to convince the DC to rule that a Credit Event happened. Who knows?? (Please email us if you do.)

It’s also notable that this is a French borrower, because US regulators have taken steps to address the worries around “manufactured” defaults, in addition to the Isda contract changes we mentioned in our last post about CDS.

Specifically, the Securities and Exchange Commission has implemented a rule covering security-based swaps, which includes the CDS market, at least in theory. Among the benefits cited by the SEC of Rule 9j-1:

. . . the prices of single-name CDS contracts would more likely reflect the fundamental credit risk of the underlying entity, as opposed to counterparty credit risk, or the probability that fraudulent activity prohibited by Rule 9j-1 is being perpetrated in connection with the CDS contracts . . . 

Again, that doesn’t apply to Casino. But for US borrowers, at least, it helps provide a less doomy explanation for the revival of CDS markets.

Further reading:
— Credit default swaps are so back (FTAV)
— Oh look the CDS market isn’t working again (FTAV Classic)