Sellers of default insurance on Aiful Corp. debt may have to pay out about $975 million to settle contracts on the company, Japan's third-biggest consumer lender.
Aiful, of Kyoto, triggered a settlement auction of credit-default swaps when it agreed to extend the maturity of loans to avoid bankruptcy, the International Swaps and Derivatives Association's Japan Determinations Committee ruled this week.
The cost of Aiful swaps implies that sellers of protection on $1.3 billion of the company's debt will pay 75 cents on the dollar to settle contracts, CMA DataVision prices show.
The ruling ends a three-month dispute that threatened to undermine confidence in Japan's default-swaps market. The committee previously rejected three requests to trigger the contracts, citing a lack of publicly available information on which to make a judgment, even though Aozora Bank Ltd. said it had not been paid by Aiful.
The dispute helped expose flaws in Wall Street's system for determining payments on derivatives linked to the debt of defaulted companies less than a year after securities firms changed practices to avoid overreaching regulation. Policymakers demanded more transparency after the meltdowns 15 months ago of Lehman Brothers Holdings Inc. and American International Group Inc., two of the largest traders, froze credit markets.
Aiful faced possible failure after Goldman Sachs Group Inc. this month demanded that its 3.7 billion yen ($39.9 million) of loans be repaid. Aiful offered to settle the borrowing at a discount to win Goldman's support for its restructuring proposal, two people familiar with the matter said.
Aiful said last week that it would delay payments on 280 billion yen ($3 billion) of debt until Sept. 30 and the ISDA's Japan committee ruled the delay constituted a so-called restructuring credit event.
Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies.
This is the first time swaps on a Japanese company will be settled at auction, and it may set a model for future events.
On Dec. 25, 2,780 contracts were outstanding on Aiful debt, making it the second-most insured Japanese borrower after the government, according to Depository Trust and Clearing Corp. in New York.