Credit Default Swaps (CDS)

CREDIT DERIVATIVES are over-the-counter contracts that allow credit risk to be exchanged across counterparties.

A CREDIT DEFAULT SWAP (CDS) is a swap contract in which the buyer of the CDS pays premium (periodic or lump-sum) to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). This event of a default is called a “Credit event”. The payment made by the seller to the buyer is called a “Contingent payment” and is triggered by a credit event (CE) on the underlying credit.

These contracts represent the purest form of credit derivatives (hence called Plain Vanilla), as they are not affected by fluctuations in market values as long as the credit event does not occur. Plain Vanilla CDS cater to the largest market share of the Credit Derivatives typically with 5 year maturities.

Credit default swaps are often used to manage the credit risk (i.e. the risk of default) which arises from holding debt. Typically, the holder of, for example, a corporate bond may hedge their exposure by entering into a CDS contract as the buyer of protection. If the bond goes into default, the proceeds from the CDS contract will cancel out the losses on the underlying bond

Example
The protection buyer, call it Mr. X, enters a 1-year credit default swap on a notional of $100 million worth of 5-year bonds issued by ABC. The swap entails an annual payment of 50bp.
At the beginning of the year, Mr. X pays $500,000 to the protection seller (the premium). At the end of the year, Company ABC defaults on this bond, which now trades at 40 cents on the dollar. The counterparty (CDS seller) then has to pay $60 million to Mr X since Mr. X can sell the bond for $40 million now
If Mr. X holds this bond in its portfolio, the credit default swap provides protection against credit loss due to default.

CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility.

CDS can be used for speculation on changes in CDS spreads. An investor who believes that an entity's CDS spreads are either too high or too low relative to the entity's bond yields may attempt to profit from that view by entering into a trade, known as a basis trade, that combines a CDS with a cash bond and an interest rate swap.

An investor may also speculate on an entity's credit quality; CDS spreads will increase as credit-worthiness declines, the investor may therefore buy CDS protection on a company in order to speculate that the company is expected to default. Alternatively, the investor might sell protection if they think that the company's creditworthiness is expected to improve.

The chapter 11 of the Bankruptcy Code, US

The chapter 11 of the Bankruptcy Code provides (generally) for reorganization, usually involving a corporation or partnership.

A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.

Who files the petition
A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements.

The debtor also must file with the court:

1. schedules of assets and liabilities;
2. a schedule of current income and expenditures;
3. a schedule of executory contracts and unexpired leases; and
4. a statement of financial affairs

Generally, a written disclosure statement and a plan of reorganization must be filed with the court. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization. The information required is governed by judicial discretion and the circumstances of the case.

The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock.

US Trustee
The U.S. trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The U.S. trustee is responsible for monitoring the debtor in possession's operation of the business and the submission of operating reports and fees.

The U.S. trustee also imposes certain requirements on the debtor in possession concerning matters such as reporting its monthly income and operating expenses, establishing new bank accounts, and paying current employee withholding and other taxes.

Creditors’ Committee
The committee is appointed by the U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession.

Automatic Stay
The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition. As with cases under other chapters of the Bankruptcy Code, a stay of creditor actions against the chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.

Under specific circumstances, the secured creditor can obtain an order from the court granting relief from the automatic stay. For example, when the debtor has no equity in the property and the property is not necessary for an effective reorganization, the secured creditor can seek an order of the court lifting the stay to permit the creditor to foreclose on the property, sell it, and apply the proceeds to the debt.

Cash Collateral
The debtor in possession may use, sell, or lease property of the estate in the ordinary course of its business, without prior approval, unless the court orders otherwise.

A debtor in possession may not use "cash collateral" without the consent of the secured party or authorization by the court, which must first examine whether the interest of the secured party is adequately protected.

When "cash collateral" is used (spent), the secured creditors are entitled to receive additional protection under section 363 of the Bankruptcy Code.

Claims
The Bankruptcy Code defines a claim as:
(1) a right to payment;
(2) or a right to an equitable remedy for a failure of performance if the breach gives rise to a right to payment.

Generally, any creditor whose claim is not scheduled (i.e., listed by the debtor on the debtor's schedules) or is scheduled as disputed, contingent, or unliquidated must file a proof of claim (and attach evidence documenting the claim) in order to be treated as a creditor for purposes of voting on the plan and distribution under it.

But filing a proof of claim is not necessary if the creditor's claim is scheduled (but is not listed as disputed, contingent, or unliquidated by the debtor) because the debtor's schedules are deemed to constitute evidence of the validity and amount of those claims.
If a scheduled creditor chooses to file a claim, a properly filed proof of claim supersedes any scheduling of that claim.

It is the responsibility of the creditor to determine whether the claim is accurately listed on the debtor's schedules.

Equity Security Holders
An equity security holder is a holder of an equity security of the debtor.
An equity security holder may vote on the plan of reorganization and may file a proof of interest, rather than a proof of claim. A proof of interest is deemed filed for any interest that appears in the debtor's schedules, unless it is scheduled as disputed, contingent, or unliquidated.

An equity security holder whose interest is not scheduled or scheduled as disputed, contingent, or unliquidated must file a proof of interest in order to be treated as a creditor for purposes of voting on the plan and distribution under it.
A properly filed proof of interest supersedes any scheduling of that interest.
Generally, most of the provisions that apply to proofs of claim, as discussed above, are also applicable to proofs of interest.

Acceptance of plan of reorganisation
Only the debtor may file a plan of reorganization during the first 120-day period after the petition is filed (or after entry of the order for relief, if an involuntary petition was filed).

The court may grant extension of this exclusive period up to 18 months after the petition date. In addition, the debtor has 180 days after the petition date or entry of the order for relief to obtain acceptances of its plan.

The court may extend (up to 20 months) or reduce this acceptance exclusive period for cause.

In practice, debtors typically seek extensions of both the plan filing and plan acceptance deadlines at the same time so that any order sought from the court allows the debtor two months to seek acceptances after filing a plan before any competing plan can be filed.

In a chapter 11 case, a liquidating plan is permissible. Such a plan often allows the debtor in possession to liquidate the business under more economically advantageous circumstances than a chapter 7 liquidation. It also permits the creditors to take a more active role in fashioning the liquidation of the assets and the distribution of the proceeds than in a chapter 7 case.

Section 1123(a) of the Bankruptcy Code lists the mandatory provisions of a chapter 11 plan, and section 1123(b) lists the discretionary provisions. Section 1123(a)(1) provides that a chapter 11 plan must designate classes of claims and interests for treatment under the reorganization. Generally, a plan will classify claim holders as secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and equity security holders.

More than one plan may be submitted to the creditors for approval, but every proposed plan and modification must be dated and identified with the name of the entity or entities submitting the plan or modification. When competing plans are presented that meet the requirements for confirmation, the court must consider the preferences of the creditors and equity security holders in determining which plan to confirm.

Any party in interest may file an objection to confirmation of a plan. The Bankruptcy Code requires the court, after notice, to hold a hearing on confirmation of a plan. If no objection to confirmation has been timely filed, the Bankruptcy Code allows the court to determine whether the plan has been proposed in good faith and according to law.

For complete Details See US Courts - Chapter 11 Bankruptcy

ESTABLISHMENT OF SPECIAL ECONOMIC ZONE

THE SPECIAL ECONOMIC ZONES ACT, 2005
ESTABLISHMENT OF SPECIAL ECONOMIC ZONE (Extracts from SEZ Act, 2005)
Procedure for making proposal to establish Special Economic Zone.
3. (1) A Special Economic Zone may be established under this Act, either jointly or severally by the Central Government, State Government, or any person for manufacture of goods or rendering services or for both or as a Free Trade and Warehousing Zone.
(2) Any person, who intends to set up a Special Economic Zone, may, after identifying the area, make a proposal to the State Government concerned for the purpose of setting up the Special Economic Zone.
(3) Notwithstanding anything contained in sub-section (2), any person, who intends to set up a Special Economic Zone, may, after identifying the area, at his option, make a proposal directly to the Board for the purpose of setting up the Special Economic Zone:
Provided that where such a proposal has been received directly from a person under sub-section, the Board may grant approval and after receipt of such approval, the person concerned shall obtain the concurrence of the State Government within the period, as may be prescribed.
(4) In case a State Government intends to set up a Special Economic Zone, it may after identifying the area, forward the proposal directly to the Board for the purpose of setting up the Special Economic Zone:

Provided that the Central Government may:-
(a) after consulting the State Government concerned;
(b) without referring the proposal for setting up the Special Economic Zone to the Board; and
(c) after identifying the area;
suo moto set up and notify the Special Economic Zone

(5) Every proposal under sub-sections (2) to (4) shall be made in such form and manner containing such particulars as may be prescribed.

(6) The State Government may, on receipt of the proposal made under sub-section (2), forward the same together with its recommendations to the Board within such period as may be prescribed.

(7) Without prejudice to the provisions contained in sub-section (8), the Board may, after receipt of the proposal under sub-section (2) to (4), approve the proposal subject to such terms and conditions as it may deem fit to impose, or modify or reject the proposal.

(8) The Central Government may prescribe the following requirement for establishment of a Special Economic Zone, namely:-
(a) the minimum area of land and other terms and conditions subject to which the Board shall approve, modify or reject any proposal received by it under sub-section (2) to (4) ; and
(b) the terms and conditions, subject to which the Developer shall undertake the authorised operations and his obligations and entitlements.
Provided that different minimum are of land and other terms and conditions referred to in clause (a) may be prescribed by the Central Government for a class or classes of Special Economic Zones.

The Central Government may, on the basis of approval of the Board, approve more than one Developer in a Special Economic Zone in cases where one Developer does not have in his possession the minimum area of contiguous land, as may be prescribed, for setting up a Special Economic Zone and in such cases, each Developer shall be considered as a Developer in respect of the land in his possession.

(13) Subject to the provisions of this section and the letter of approval granted to a Developer, the Developer may allocate space or built up area or provide infrastructure services to the approved units in accordance with the agreement entered into by him with the entrepreneurs of such Units.

4. (1) The Developer shall, after the grant of letter of approval under sub-section (10) of section 3, submit the exact particulars of the identified area referred to in sub-section (2) to (4) of that section, to the Central Government and thereupon that Government may, after satisfying that the requirements, under sub-section (8) of section 3 and other requirements, as may be prescribed, are fulfilled, notify the specifically identified area in the State as a Special Economic Zone:

Establishment of Special Economic Zone and approval and authorisation to operate to, Developer.
Provided that an existing Special Economic Zone shall be deemed to have been notified and established in accordance with the provisions of this Act and the provisions of this Act shall, as far as may be, apply to such Zone accordingly:

Provided further that the Central Government may, after notifying the Special Economic Zone, if it considers appropriate, notify subsequently any additional area to be included as a part of that Special Economic Zone.
(2) After the appointed day, the Board may, authorise the Developer to undertake in a Special Economic Zone, such operations which the Central Government may authorise.

5. (1) The Central Government, while notifying any area as a Special Economic Zone or an additional area to be included in the Special Economic Zone and discharging its functions under this Act, shall be guided by the following, namely:-
Guidelines for notifying special Economic Zone.
(a) generation of additional economic activity
(b) promotion of exports of goods and services;
(c) promotion of investment from domestic and foreign sources;
(d) creation of employment opportunities;
(e) development of infrastructure facilities; and
f) maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.

Processing and non-processing areas.
6. The areas falling within the Special Economic Zones may be demarcated by the Central Government or any authority specified by it as-
(a) the processing area for setting up Units for activities, being the manufacture of goods, or rendering services; or
(b) the area exclusively for trading or warehousing purposes; or
(c) the non-processing areas for activities other than those specified under clause (a) or clause (b).

Exemption from taxes, duties or cess.
7. Any goods or services exported out of, or imported into, or procured from the Domestic Tariff Area by, -
(i) a Unit in a Special Economic Zone; or
(ii) a Developer;
shall, subject to such terms, conditions and limitations, as may be prescribed, be exempt from the payment of taxes, duties or cess under all enactments specified in the First Schedule.

For complete details, see SEZ Act, 2005