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Enron Mail |
I think we should issue a statement regarding the deliverability of the Railtrack convertible bonds. First, I do not think that plain vanilla converts are "contingent." and therefore should be deliverable. Second, I think we need to have clarity and certainty here so that this issue does not become another cloud over the credit derivatives market. The statement should simply be ISDA's view as to the meaning and intent of its own document. We should probably wait until we have had the opportunity to see a draft of the opinion to be issued by Robin Potts (QC?) just to make sure that the statement and his opinion are in agreement. RPICKEL@isda.org on 10/15/2001 12:06:35 AM To: BOARD@isda.org cc: KSumme@isda.org, LMarshall@isda.org Subject: Credit Derivatives Issue You should be aware that an issue is currently under extensive debate in the credit derivative area resulting from the insolvency of Railtrack in the UK. ISDA has been asked by some participants in the market to make a statement regarding a provision of its Credit Derivatives Definitions. Others are either still considering their position or would prefer that ISDA not issue a statement. Specifically, the discussion relates to the deliverability of convertible bonds of Railtrack. There is no dispute that a Credit Event occurred. What is in dispute is whether the bonds satisfy the definition of "Not Contingent" under the Definitions, which is a characteristic typically required of deliverable obligations. This characteristic requires that the payment or repayment of principal on the bonds not be subject to a contingency. The bonds are convertible into equity of Railtrack at the option of the holder or, in certain limited circumstances, at the option of the trustee for the bondholder. The provision for the trustee to exercise the conversion (sometimes referred to as a "widows and orphans" clause) is a standard clause in bonds issued in England and is intended to protect bondholders who may have inadvertently failed to exercise their conversion right when it would be clearly beneficial economically for them to do so. In the case of Railtrack, conversion would not have been economically beneficial at any time recently, but nevertheless the right of the trustee to convert exists. A draft statement has been prepared for consideration by the Credit Derivatives Market Practice Committee, which I have attached for your review. The statement refers to two documents that are in draft form, the User's Guide to the Definitions (which is scheduled to be published in the next week or two) and a Supplement currently under consideration by the "group of six" subgroup of the Committee. In each of these documents, we suggest that "plain vanilla" convertible bonds should satisfy the "Not Contingent" characteristic and should, therefore, be deliverable. "Plain vanilla" convertible bonds for this purpose include bonds where conversion is at the option of the holder of the trustee. A meeting of a number of dealers based in London (not an ISDA meeting) is scheduled for Tuesday. It is not likely that we will publish anything prior to that meeting. I would appreciate your views on whether we should issue any statement regarding this situation. We are continuing to poll members for their views on whether this type of market statement would be appropriate. We are also discussing with Allen & Overy and with Clifford Chance and Linklaters how we might achieve a legal basis for making the statement. Please share your views with the other addressees of this email, as they are coordinating the views of members. Bob This communication is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. Any comments or statements made herein do not necessarily reflect those of J.P. Morgan Chase & Co., its subsidiaries and affiliates.
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