Nomura International Plc v Credit Suisse First Boston International

Under the 1999 ISDA Credit Derivatives Definitions, a bond is not rendered contingent merely because the holder may elect to exchange it for shares. The relevant question is whether repayment may be affected by an external event outside the holder’s control. A provision designed solely to protect the holder’s interests does not ordinarily create such a contingency. The same applies where a trustee may exercise an exchange right on the holder’s behalf, if the power is confined to circumstances beneficial to the bondholders. Where a credit derivative contract specifies the settlement currency and the contractual payment date, damages for non-performance may be awarded in that currency. The claimant’s loss must be assessed by reference to the currency which the contract and the true loss identify.

Nomura purchased credit protection from CSFB in relation to Railtrack plc. Following a bankruptcy credit event, Nomura sought to deliver Railtrack 3.5% Exchangeable Bonds due 2009 for physical settlement. CSFB rejected the bonds, contending that exchange rights in favour of bondholders and the trustee meant that repayment of principal was subject to a contingency and that the bonds were therefore not deliverable obligations.

Nomura subsequently sold the exchangeable bonds and acquired non-exchangeable Railtrack bonds for delivery. The parties disputed both the additional sterling acquisition cost and the shortfall caused by exchange-rate movements. The issues were whether the exchangeable bonds satisfied the “Not Contingent” characteristic and, if so, the currency in which the resulting damages were recoverable.

1. Deliverable obligations. Nomura was entitled to deliver the Exchangeable Bonds. Under sections 2.18(b)(vii) and 2.19 of the 1999 ISDA Credit Derivatives Definitions, repayment is subject to a contingency where the holder may be deprived of the full benefit of repayment by an external event over which the holder has no control.
2. The holder’s exchange right under Condition 9(a) did not create such a contingency. It depended on the holder’s own election, operated in the holder’s interest, and did not alter the right to repayment if the holder chose to claim it. The commercial context of a credit event also meant that the exchange right would ordinarily have become valueless when the protection was claimed.
3. The trustee’s power under Condition 9(d) produced the same result. Although it involved an independent decision by the trustee, the power could be exercised only to benefit the bondholders, was subject to safeguards, and required the exchanged shares to be sold promptly. It therefore did not make repayment contingent within the meaning of the Definitions.
4. The Exchangeable Bonds were accordingly deliverable obligations, and CSFB should have accepted them when Nomura served the relevant notices. Nomura was entitled to the agreed sterling difference of £1,023,129.36.
5. The further dollar claim was also recoverable. Damages for breach are awarded in the contractual currency or, absent such provision, the currency in which the loss was felt or which most truly expresses it: The Despina R [1979] AC 685 (HL) at 701. Here both the contract and Nomura’s true entitlement pointed to US dollars, producing an additional award of $247,475.
6. The court would hear the parties on the appropriate order, interest, costs and ancillary matters.