Monday, April 27, 2009

ISDA Seeks Determination If MBIA Succession Event Has Occurred

In a development out of left field today, which caught the CDS market largely unaware, ISDA came out with a release in which it is seeking broker feedback on whether there has been a succession event at MBIA Insurance corporation on February 17, and that MBIA Illinois and MBIA Corp are successors.
By way of explanation:

For the purpose of determining whether MBIA Illinois has “succeeded” to the Relevant Obligations of MBIA Corp pursuant to a Succession Event, Section 2.2(b) and 2.2(c) of the 2003 ISDA Credit Derivatives Definitions (“2003 Definitions”) requires that (i) MBIA Illinois “assumes or becomes liable for such Relevant Obligations” and (ii) MBIA Corp “is no longer an obligor (primarily or secondarily) or guarantor with respect to such Relevant Obligations.” Both of these conditions are met as set forth in Section 2 of the Assignment and Assumption Agreement:

“Without limiting the foregoing, as contemplated by the FGIC Reinsurance Agreement and the FGIC Trust Agreement, unless and until revoked by agreement of the parties hereto as contemplated below, it is the parties’ intention that:

(i) MBIA Illinois shall be substituted for MBIA Corp under each of the FGIC Reinsurance Agreement and the FGIC trust Agreement, in MBIA Corp’s name, place and stead;

(ii) MBIA Corp shall be deemed to have ceased to be a party to the FGIC Reinsurance Agreement and the FGIC Trust Agreement, and shall be discharged from all obligations and liabilities to FGIC and/or the Trustee, as applicable, thereunder; and

(iii) FGIC and the Trustee, as applicable, will look solely to MBIA Illinois for performance of any and all obligations and liabilities owed to it under each of the FGIC Reinsurance Agreement and the FGIC Trust Agreement.”

What this means for CDS holders is still nebulous, but could easily create some pain for CDOs that have been caught with unhedged portfolios. Additionally, the impact this would have on FGIC reinsurance protection is also unclear. One observation is that MBIA Illinois is taking more than 25% of the 'obligations' and so CDS succeeds to them and leaves MBIA Opco - possible resulting in a major rally for MBIA Opco. Will be one to monitor closely.

hat tip Credit Trader Sphere: Related Content
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