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Renmin University Protection Under the ISDA Master Agreement 2002 Questions

Renmin University Protection Under the ISDA Master Agreement 2002 Questions

Question Description

I’m working on a law report and need support to help me understand better.

Financial law distinction exam model answer required for the following question, between 1000-1200 words, OSCOLA referencing:

China Global Investments (CGI), an investment fund, had entered into a number of derivatives transactions including credit default swaps (CDSs) with Banco Majorfiasco (BM), an Italian bank. All transactions are subject to an ISDA Master 2002 entered into between CGI and BM. Confirms relating to these transactions incorporated the ISDA Definitions for FX & Currency Options or the ISDA Credit Derivatives Definitions 2014 as amended as appropriate to the transactions.

i) There were three NDF (non-deliverable forward) transactions which were € to Vodkussian Kroner which are due to be settled in seven days time. The Vodkussian Central Bank today suspended all dealings in Vodkussian Kroner in the markets and currency quotes for the Vodkussian currency against the € or $ is no longer available in the markets.
ii) The first of the CDSs was in respect of € bonds issued by Banco Oporto et Bacalao (BOB), a Portuguese Bank, which is now in serious financial difficulty due to the economic consequences of the Coronavirus pandemic. The second was in respect of US $ bonds issued by BOB. The € bonds are governed by Portuguese law while the $ bonds were subject to English law. The Portuguese Central Bank acting under its powers conferred on it pursuant to the EU’s Bank Recovery and Resolution Directive(BRRD) has decreed a mandatory conversion of the € bonds into shares of BOB to satisfy the “bail in” requirement of the BRRD before the Italian Central Bank could inject funds by way of equity capital into BOB. The Central Bank has also transferred the $ bonds from BOB to a new bank Novo Banco (NB) exercising powers conferred on it pursuant to the BRRD.
iii) The Reference Obligation of the third CDS were € bonds issued under English law by Marmara Corp, a Turkussian conglomerate, which are to be redenominated by the Turkussian government into Arakis (a new currency) if Turkussia continued to be in serious financial difficulty due to the Coronavirus pandemic ravaging its major European trading partners.

iv) The fourth was in respect of US $ denominated bonds of Amazonas Air (AA), a Brazilian airline. AA is in the process of being compulsorily restructured and merged under local corporate law due to major financial difficulties resulting from the Brazilian economy suffering heavily due to the severity of the pandemic in Brazil. The result of the merger and restructuring would be that 80% of the assets and liabilities of AA including the $ bonds become the liability of a new corporate entity, Bahia Aviation (BA) while the remaining assets and liabilities would be transferred to a Brazilian state corporation.
v) A fifth CDS was in respect of US $ denominated bonds issued by Santiago Oil (SO), a state-owned corporation in Parazuela, a country in central America, which is in financial difficulty due to the recent large fall in oil prices. The bonds are subject to English governing law. The Government has by decree required all Parazuelan corporates to reduce the principal amount of all foreign currency denominated bonds by half and reduce interest payable on the bonds by three quarters of interest due. SO has announced that it will carry out the Government’s instructions starting on the next interest payment date. SO has also requested a major investor in Parazuelan bonds to try to trigger the collective action clause procedures in the SO bonds with a view possibly to changing the terms of the bonds so as to comply with the government’s instructions .
vi) The sixth was in respect of € bonds of Ayuthya & Sukhothai Construction (ASC), a corporate entity set up in Taipanbodia. These bonds include a call option which enables ASC to exercise a call option if the average market price of its shares over 30 days is 30% above the strike price in the convertible. This condition is now satisfied and it is expected that the call option will be exercised by ASC in the next week.

7. vii) The seventh was in respect of $ bonds of Soba and Sushi (SS), a South Korean financial institution. Under the terms of the bonds if its capital ratios fell below those specified in the Central Bank’s current requirements for capital of major financial institutions, the bonds would automatically convert into the equity of SS in accordance with a conversion ratio contained in the bond instrument. SS’ audited accounts published yesterday show that it is in breach of the Central Bank’s capital ratio requirement.

Advise CGI as to its legal rights under the terms of the derivatives transactions described above.

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