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Payout for Eircom bondholders after default of parent

EIRCOM bondholders are in line for a major insurance payout after its parent company was ruled to be in default.

Confirmation of the biggest corporate default in Irish history comes as Eircom is already known to be preparing to go to the High Court to seek an examinership on either Thursday or Friday next week.

Yesterday, the International Swaps & Derivatives Association (ISDA) said Eircom's parent company, ERC Ireland Finance Limited, is in default.

It means Wall Street banks that sold insurance contracts to bondholders in the form of Credit Default Swaps (CDS) will have to pay out.

In February, Standard & Poor's said Eircom was in "selective default" after missing an interest payment to bondholders.

The Eircom decision is ISDA's first since the body grabbed global headlines with its ruling that insurance on Greek government bonds must also pay out.

The ruling came after investment bank UBS sought a decision in relation to the insurance.

Failure

In response, ISDA said Eircom's parent had gone through a 'failure-to-pay credit event', market jargon for defaulting on a payment.

The missed payment was €5.77m in interest that fell due on February 15. It is due to bondholders owed €350m of Eircom's €3.75bn of debt.

A 'grace period' when the payment could still have been made expired on March 16, and UBS immediately sought a ruling in relation to the bond insurance.

A second request to ISDA sought to know whether Eircom, the company that actually operates the telephone system, was also in default. The committee ruled that it was not.

ISDA is the body that oversees the trade in CDS contracts -- its ruling only affects market participants and has no impact on Eircom itself. The telecom company has no liability for the insurance payout.

The CDS market is self-regulated -- decisions such as the Eircom ruling are made by a committee drawn from financial institutions that buy and sell the insurance.

It means a payout for Eircom bondholders facing a total loss on their €350m investment. As much as €290m of the bonds are insured -- the payout could run to hundreds of millions of euro, though bondholders have been paying massive premiums for the protection for well over a year. The bonds are only a small fraction of Eircom's €3.75bn of debt. It's the one slice of the debt backed by insurance, however.

Efforts to tackle Eircom's debts have intensified in recent weeks. Secured lenders are preparing to seize control of the company through the examinership process.

Eircom has been in technical default since August last year, when it breached the 'covenants' setting out terms and conditions attached to its loans.

A 'waiver' from lenders that allows the firm to continue trading runs out on March 31.

ISDA only made its ruling after Eircom defaulted on an interest payment, a much more serious type of 'credit event'.

Banks, including Goldman Sachs and Morgan Stanley, plus insurance giant PIMCO will now hold an auction to determine how big a payout insured bondholders receive.

Irish Independent