Traders reject Citi’s insolvency call on Sino-Forest CDS

Isda’s credit derivative determinations committee has ruled this morning that there has been no credit event so far on troubled Chinese forestry company Sino-Forest. Market participants rejected arguments by Citi, which posed the question, that the borrower is already insolvent despite not yet having filed for any kind of court protection or definitively missed any due debt payments. The Isda committee voted 14-to-one that no bankruptcy credit has occurred, with only Citi voting in favour.

Sino-Forest, which has been rocked by fraud allegations, failed to make a coupon payment on 15 December. But this does not yet count as a default on its credit default swaps because the 30-day grace period has not yet elapsed.

However, Citi argued that the Chinese company’s acknowledgement of its problems meant that it had triggered the little used section 4.2b of the credit event definitions. This says that a bankruptcy credit event can include situations where a borrower becomes insolvent, is unable to pay its debts, fails generally to pay its debts as they come due, or admits its inability to pay debts in a filing. The bank pointed out that Sino-Forest has said that it is unlikely to be able to make the payment within the grace period or file its next accounts on time.