CDS Payout Uncertainty Is Pushing Investors Out of Ardagh Trade

(Bloomberg) — Uncertainty over the rules governing the payout of credit default swaps has sown confusion among traders ahead of a potential settlement tied to Ardagh Group SA, the Irish glass bottle and packaging maker.

Buyers and sellers of derivative contracts on the company’s debt have been left guessing about the precise timing of a so-called credit event — the moment when insurance-like protection is supposed to kick in — pushing some holders to unwind positions before knowing whether they’ll be compensated.

The episode threatens to become yet another example of how the CDS market can fail to deliver the protection buyers expect, particularly as corporate debt structures grow more complex and more disputes play out outside traditional court processes.

“A lot of people looked at the situation and had to make a probabilistic determination, and exited their position even though they felt like they had the right take on the matter,” said John Williams, a partner at law firm Milbank and head of its global alternatives practice, who’s representing some buyers of Ardagh’s credit default swaps.

Creditor Agreement

The reason behind the uncertainty over the timing has to due with the consensual route taken to push through the deal. Talks between Ardagh, controlled by Irish billionaire Paul Coulson, bondholders and lenders started in early 2024. A deal that handed over the company to creditors was agreed in July and got the backing of more than 90% of secured and unsecured debt investors back in August. A so-called amicable agreement was announced on Nov. 12, and the restructuring closed that same day.

The Credit Derivatives Determinations Committee, a panel which oversees the swaps market, agreed a credit event had occurred no later than the day the restructuring was completed. The committee, however, couldn’t determine whether it happened earlier and was forced to call in an external panel of experts to rule on the matter. A final decision is expected by Dec. 16, according to a notice on the CDDC website.

While the most commonly used CDS contracts have a standard duration of five years, it’s also possible to trade shorter-term contracts, with maturities of even three or six months. In the Ardagh case, some buyers of protection closed their trade early, while some of the contracts may have expired since the bulk of the creditors signed into the debt deal over the summer.

The net notional outstanding volume of credit default swaps contracts tied to Ardagh stood at $165 million at the end of October, according to data from the Depository Trust & Clearing Corporation. At the beginning of June, that figure stood at around $230 million.

“We believe that a restructuring event occurred much earlier” than Nov. 12, Williams said. That’s because a restructuring deal triggers a credit event when creditors reach an agreement “that is binding on all holders.”

“There is a strong basis under the contract to reach a decision that aligns with the commercial reality,” he said.

At least some CDS market players have been privately disputing this interpretation, arguing there was no binding agreement until the company accepted the notes tendered on Nov. 12, according to a person familiar with the matter. They claim a ruling in favor of an early trigger may lead to even more uncertainty in future restructurings, the person said.

Additional Complexity

An additional complexity stems from the technicalities of the payout process. Traditionally, bonds underlying the derivative must be delivered in an auction set by the CDDC in order to determine the CDS price. In this case, because the consensual deal has gone live, the unsecured notes have been written off as part of the process and there are none left.

“A deliverable obligation must be an outstanding debt claim at the time of the credit event,” said Josef Pschorn, a portfolio manager at XAIA Investment GmbH. The senior unsecured notes “no longer exist as debt, and equity does not qualify as deliverable under the International Swaps & Derivatives Associations’ definitions.”

The CDDC, however, has the power to make some limited changes to the terms of the auction in specific cases.

A question on whether each of the senior unsecured notes issued by Ardagh Packaging Finance Plc would be a deliverable obligation in the case of a credit event is yet to be ruled on by the panel.

The final decision of the external experts on the timing of the event, and how the swaps get settled, could be relevant not just for Ardagh CDS investors but also for the broader market where out-of-court debt deals have replaced many traditional in-court workouts.

So-called liability management exercises can take months to complete and are treated differently across jurisdictions — in the US, for instance, out-of-court restructurings are generally not viewed as credit events for CDS purposes — leaving even more room for conflicting interpretations.

©2025 Bloomberg L.P.