What happens when Lyondell Bassell defaults with CDS protection?

Posted Mar 24th 2009 2:00PM by Connie Madon
Filed under: International Markets, Recession, Financial Crisis

Lyondell Basell is the world's third largest petrochemical group. In January Lyondell put its U.S. units into Chapter 11 bankruptcy and missed its regular coupon payment of $680 million of 2015 European bonds. It was given a 30-day grace period that ran out this week. Then all hell broke loose.

Holders of the debt, including investment banks, had to vote to decide if Lyondell was in default. They voted "yes" on Friday. Now those who sold the credit default protection must come up with payment to cover losses on Lyondell bonds.

To further complicate the process, Lyondell is one of the companies in the iTraxx credit derivatives index. There are 50 companies in the index, so 1/50th or 2% of the value of all index trades will have to be paid out, minus the recovery value of the bonds themselves, which were worth 3.5 euro-cents on Friday.

Lyondell is buying time by being granted a 60-day restraining order to try and prevent creditors from triggering payment of the CDS contracts.

Just from this one case, you can imagine the nightmare that we could have if this happens on a widespread scale.

Do you believe the Federal Reserve can avoid this scenario here in the U.S.?

Tags: defaults with CDSs, DefaultsWithCdss, inthenews