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ISDA Resolves Failure to Pay Credit Event

The International Swaps and Derivatives Association's (ISDA) credit derivatives rule-making body unanimously agreed with a position argued by Paul, Weiss that a Failure to Pay Credit Event had occurred with respect to iHeartCommunications, Inc. (iHeart), a media and entertainment company and the nation's largest owner of radio stations.

Paul, Weiss submitted a memorandum on behalf of a group of protection buyers under credit default swaps (CDS) arguing that a Credit Event had occurred based on iHeart's recent decision not to repay $57.1 million in principal amount of its 5.5% senior notes due 2016 held by its wholly owned subsidiary Clear Channel Holdings, Inc. The non-payment was part of a strategy by iHeart to avoid an obligation to grant additional collateral under a "springing lien" to certain of its creditors. Clear Channel agreed that it will not currently seek remedies against iHeart in respect of the nonpayment.

The rule-making body, the ISDA Credit Derivatives Determinations Committee is responsible for determining for all CDS market participants whether a Credit Event has occurred based on publicly available information. The nonpayment by iHeart raised unique technical and policy issues since the ISDA Determinations Committee had never before been asked to decide a situation where an affiliate of the borrower had purchased bonds and the borrower subsequently decided not to make a payment to the affiliate.

The determination sought by Paul, Weiss was for a finding of a Credit Event to preserve certainty and transparency in the CDS markets and to protect the integrity of CDS as an efficient hedging tool. Linklaters argued on behalf of an undisclosed market participant that no Credit Event had occurred because Clear Channel's agreement not to exercise its remedies in essence rendered the payment not "due." The ISDA committee followed the Paul, Weiss argumentation and voted 15-0 in favor of a Credit Event.  

The Paul, Weiss team included litigation partner Richard Rosen; and corporate partners Manuel Frey and Lawrence Wee and counsel Edward So.

December 21, 2016

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