Sunday 22 January 2017

Eircom rating cut over 'selective default'

Published 23/02/2012 | 05:00

Paul Donovan, CEO, Eircom: missed interest payment
Paul Donovan, CEO, Eircom: missed interest payment

RATING agency Standard & Poor's said Eircom is in "selective default" after missing an interest payment to bond holders.

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Yesterday the rating agency cut its rating on ERC Ireland Finance, the parent company of Eircom Group to "selective default" from "CC".

A borrower is considered to be in "selective default" if it decides to delay repayment of some financial obligations, but continues to meet other debts as they fall due.

The Eircom interest payment has officially only been suspended, but no one inside the company or in the markets expects the €5.77m payment due ever to be paid.

The S&P downgrade helps build a case for bondholders to seek a payout on their bond insurance -- so called 'credit default swaps' (CDS). Bondholders owed €350m by Eircom have insured as much as €290m of the debt according to the Depository Trust & Clearing Corporation (DTCC), the company that processes bond trades.

Losses

The bonds are just a small part of Eircom's €3.7bn of financial debts and holders look certain to face massive, even total losses, when the company goes to court seeking a debt write-off. That's expected to happen in March.

The CDS contracts mean that investors that own bonds that are wiped out in debt restructuring will be able to recover some of the losses.

The insurance will be paid out once a committee of banks and investors agrees that a "credit event" has occurred -- that's market jargon for a default.

A ruling can only be made after one of the insured bondholders makes a formal request to the committee. No request has been made so far, but insiders say bondholders are waiting for a 30-day 'grace period' to expire.

The grace period gives Eircom a second chance to make the missed payment, the company has said it does not plan on making the payment.

However, not all insurance buyers will get a full payout.

Eircom bonds are the most expensive debt in the world to insure, more so even than Greek government debt, and that will eat into how much holders recover from their insurance.

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