The International Swaps and Derivatives Association (ISDA) ruled that B&B’s failure to keep up with payments on £325m of Tier 2 bonds constituted a “credit event”, meaning the insurers will have to pay out.
This will come as good news to Legal & General’s investment arm and US investment banking giant Morgan Stanley, who originally launched the calls for the ISDA to make the ruling so they can collect their B&B insurance.
The New York-based ISDA said auctions will now be held to determine how much the issuers of the products – known as credit default swaps (CDS) – will have to pay out.
Spreads on CDS markets – seen as an indicator of the level of investor fear over bond defaults – tightened last night, which is a sign of improved confidence on the markets.
This reaction came as CDS traders saw the B&B payouts as a reassuring sign the products can and do have an important use.
The Markit iTraxx Europe CDS index closed at 120.5 basis points, 2.2 per cent tighter on the day.