Let the Seller Beware? Debtor’s Attempt to Monetize its Own Default May Impact Sellers of Credit Default Swaps
The Sears bankruptcy case made headlines this month in the complex world of credit default swaps (CDS). A credit default swap is a contract pursuant to which the seller receives payment from a buyer in exchange for which the seller must compensate the buyer in the event of a default or other specified credit event. On November 9, in what it openly admitted was an attempt to take advantage of the abundance of default protection issued in the days leading up to its bankruptcy filing, Sears sought permission to auction certain “medium-term notes” (MTNs) that were issued by Sears Roebuck Acceptance Corp. (“SRAC”) prior to the petition date and held entirely by affiliates of Sears.