CDS may be triggered by autos czar, says Bank of America

A US autos czar may trigger credit default swap contracts, says Bank of America. Analysts posit that the result may depend on the exact wording of a potential bailout package and the process is likely to be determined through Isda. Based on the wording of the recent draft bill, there are two potential triggers for autos CDS: bankruptcy and modified restructuring credit events.

The legislation proposes that an autos czar would have the authority over all autos company expenditure over $25 million.

Furthermore, should an autos bailout occur without triggering CDS contracts, Bank of America anticipates the risk that LCDS, and the autos portion of LCDX, contracts may become orphaned. The proposed bailout plan would create a new first lien loan that is senior to current first lien auto loans. The new first lien loan would then become the deliverable obligation into standard autos LCDS. Investors may find it difficult to obtain the loan as the government will be holding them.