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07 June 2017 by lberuti

For once, taxpayers’ money will not be tapped for the rescue of a bank. In a deal brokered by the regulators, SANTAN ( Banco Santander SA ) is stepping in to take over stricken rival Banco Popular Espanol. Tier1 notes were converted into stocks and SANTAN bought the whole equity of the company for a token €1. It means that holders of equity and subordinated debt are effectively wiped out, while holders of senior debt are spared. It is also the first time the new Credit Default Swap documentation introduced in 2014 will have the opportunity to prove its worth. Buyers of subordinated protection on Popular under the previous 2003 documentation will not get any compensation. Debt instruments are the only deliverables into that type of contracts and there is no subordinated debt outstanding. It means that Senior bonds, which are now trading close to or above par, will be the cheapest deliverables, making the contracts worthless. Buyers of senior protection under the 2003 documentation will see their contracts cross triggered by the default of the subordinated debt, and will not get any compensation either for the same reason. Buyers of subordinated protection under the 2014 documentation will be able to trigger their contracts under the Government Intervention clause, and will be able to deliver the proceed of their exchanged subordinated bonds, i.e. nothing. They will be compensated in full for the notional they insured. Finally, there should not be a trigger of the senior protection contracts under the 2014 documentation, and their holders will now be insured against the default of SANTAN’s senior debt.