Marconi restructuring sparks credit derivatives confusion

Plans unveiled today by troubled UK telecoms company, Marconi, to restructure and reduce its debt to under a billion have caused confusion in the credit derivatives community. Traders said they were unsure whether the language used in the Marconi announcement constitutes a ‘credit event’ under International Swaps and Derivatives Association rules that triggers a payout for credit default swap protection holders.

The confusion stems from default swaps being issued on two Marconi companies, Marconi plc and Marconi Corporation plc. While trader consensus was that the financial restructuring of Marconi Corporation plc appeared to constitute a credit event, they were unclear whether the “liquidation” of Marconi plc “on a solvent basis” also constituted a credit event. “The language about Marconi plc is a cause for concern,” said a London-based trader at a European bank. “We are investigating that at the moment,” he added.

A trader at a large US investment bank in London said Marconi could prove the biggest test so far for European credit derivatives documentation and had five times the number of issues compared with Railtrack – the UK rail operator that hit financial difficulties at the end of last year.

The restructuring of Marconi Corporation plc is targeted for January 2003. Under the terms of the restructuring, lending banks and bondholders will gain 99.5% of the equity in the newly restructured company that will be dual-listed on the London Stock Exchange and Nasdaq in the US. Marconi claims will be exchanged for a package of cash, the new equity and new debt securities. But the Marconi proposals still need formal approval by creditors and loan syndicate banks, although one trader said there is unlikely to be much disagreement on the issue.

Credit default swaps protection has been unavailable on Marconi for the best part of a year.

Isda officials were not immediately available for comment.