Marconi default chaos rocks markets

WHEN is a default not a default? This is the question that has been exercising some of the City's brightest stars this week following the long-awaited restructuring of telecoms group Marconi.

Last Thursday's announcement, after months of tortuous negotiation, has thrown London's fast-growing credit derivatives market into something of a tizzy.

At stake is some £500m of outstanding Marconi credit derivative contracts and the setting of a landmark precedent for a young market still in its 'make it up as we go along' phase. The debate is whether the restructuring has triggered so-called default swap contracts. These give the holder the right to demand repayment at face value in the event of a default.

It is the latest and most fashionable way for banks to lay-off loan book risk. The instruments have become particularly volatile over the past two years because of the large number of major companies defaulting on or restructuring debt. According to one senior market player: 'There have been a lot of defaults ever since it all started with Railtrack, but, as it is an evolving product, every credit is different with its own particular quirks.'

The restructuring of Marconi, led by acting chief executive Mike Parton, has left a number of issues unresolved.

First, has a restructuring actually taken place? The draft agreement has been announced for sure. But it has not been formally approved and completed - and may not be until January.

Secondly, is it a restructuring or a fully-fledged bankruptcy? That raises a third dilemma - has the debt in question been issued by Marconi plc (which is being dissolved) or with Marconi Corporation (the new business)?

A debate has been raging in the market on each of these unresolved issues for a week. There will be no lead from the market's trade body, the International Swaps and Derivatives Association, which does not step in to resolve disputes between member firms.

As ever, it may well be for m'learned friends and the courts to untangle the mess. According to ISDA's Ed Duncan, its job is to make sure the documentation it issues keeps up with the break-neck pace of development in the market. A third supplement to the credit derivative documentation issued in 1999 is already being worked on.

Although Marconi has been a high-profile example, its outstanding debt of around £4bn is minuscule compared with the tens of billions issued by some of the telecoms titans such as France Telecom. Should one of these restructure, it will make the spat over Marconi look like a playground squabble.