Credit Default Swaps (CDS) are instruments that enable holders of bonds and loans to hedge their credit risk by purchasing protection against a default by the issuer/borrower on such instruments, and to enable investors to make bets on the likelihood of such defaults even if their position in the underlying debt instruments is smaller than their CDS position (i.e., they are “net-short”) or they do not hold the underlying debt instruments at all.
As the market response to the perceived issues created by net-short holders continues to evolve, in a special Corporate Restructuring & Bankruptcy report published by The New York Law Journal on Sept. 23, restructuring partner Matthew Roose, finance partner Alyson Gal and finance counsel Jill Kalish Levy examine CDS net short holder market developments. The feature outlines several recent situations where buyers of CDS protection have used their positions as holders of the issuer’s debt to bring about CDS credit events, highlighting several important issues which may precipitate future changes in loan and bond documentation.
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