The 2002 ISDA Master Agreement Credit Event upon Merger is a provision in the International Swaps and Derivatives Association (ISDA) Master Agreement that outlines how a credit event will be treated in the event of a merger or acquisition.
In simple terms, a credit event is a trigger that activates a payment under a credit default swap (CDS) contract. It can be caused by various events such as bankruptcy, failure to pay, or a debt restructuring. An ISDA Master Agreement is a standard contract used in the derivatives market to govern transactions between parties.
In the context of a merger or acquisition, the Credit Event upon Merger provision comes into play when a company that has issued CDS contracts undergoes a merger or acquisition. If the company is acquired or merged with another company and the original company is not the surviving entity, the Credit Event upon Merger is triggered.
This can happen in two ways. Firstly, if the acquiring company is not already a party to the original CDS contract, then the Credit Event upon Merger will be triggered and the CDS contract will be terminated. The protection seller (the party who sold the CDS contract) will be required to pay the protection buyer (the party who purchased the CDS contract) the full amount of the contract.
Secondly, if the acquiring company is already a party to the original CDS contract, then the Credit Event upon Merger will not be triggered. Instead, the CDS contract will remain in force and the acquiring company will become the new reference entity. The protection buyer will continue to pay the premium to the protection seller and the terms of the contract will remain the same.
This provision ensures that parties to CDS contracts are protected in the event of a merger or acquisition. It also ensures that parties to the contract are aware of the potential risks involved in such transactions.
In conclusion, the 2002 ISDA Master Agreement Credit Event upon Merger is an important provision that outlines how a credit event will be treated in the event of a merger or acquisition. It ensures that parties to CDS contracts are protected and aware of the potential risks involved in such transactions.