Ardagh, a European manufacturer of glass and metal packaging, has grown through accelerated acquisitions since 1998. Last October, the company restructured $3 bn of debt, impacting approximately $6 bn of CDS.
The restructuring has been less than straightforward, generating volatility in the CDS market, and once again testing the process by which CDS deliver their final payout.
How CDS settlement works
All derivatives deliver their final payment based on the “final settlement price” of the underlying asset.
For stock options, that settlement price is (usually) the closing price of the stock on expiry. Interest rate swaps historically relied on the relevant LIBOR fixing, which led to a manipulation scandal and the transition to SOFR.
These reference prices are (supposed to be) objective and difficult to manipulate.
For credit derivatives, things become complicated.
A CDS insures against the default of bonds. De facto, for the CDS to deliver its benefit, the bond must first default in a “credit event”. So how do you value a bond after default, aka when it has stopped trading?
The solution is to organize one big auction.
Every bond holder may unwind all or parts its bonds one last time, while the banks buy for distressed debt managers, the junk bond hedge funds, who will go through the painful bankruptcy process. This final auction sets the reference price for the bond after default, which in turn sets the final CDS payments.
The rules governing that ‘big auction’ have been put in place by the largest banks in 2014 under the supervision of ISDA.
There have been multiple criticisms of its objectivity and reliability, including an antitrust lawsuit [source].
Not all companies go to a black-and-white bankruptcy.
Debt restructuring may also qualify as a ‘credit event’. Whether a complex restructuring qualifies is not always obvious, and various levels of reviews complement the rules.
A further complication is that a company may have several bond issues, of various seniority and quality.
Determining which bonds are included in which auction is also subject to criticism.
This is what happened with Ardagh.
The whereabouts of Ardagh’s auction
The governance of CDS auctions is a bit complicated (there are actually two consecutive auctions). A two-page explanation is available here; it is not the object of this article.
The relevant issues for Ardagh are:
- CDS are insurance contracts. They reimburse against the bonds’ loss of value in the default. If the bonds are valued lower in the default auction, the insurers pay more to the insurer. Insurers and insured have opposite incentives in the final settlement process.
- The more bonds are put on sale, the lower the price of the auction.
- The SUNs issued in the restructuring are unsecured, and of lower quality (lower price) than Ardagh’s other (secured) bonds. Including them in the auction ‘dilutes’ down the overall quality and pushes the auction price down… for all the bonds in the auction.
- A hedge fund called Arini had not only invested in Ardagh bonds; it also sold billions of dollars of Ardagh CDS. The restructuring hurts Arini both as an investor and as an insurer.
- A low auction price is a double whammy for Arini. This explains why they fought for the SUNs to be excluded from the auction.
- On the other hand, Tresidor and Laurion had purchased CDS. They want the insurance contract to pay more, and the auction price to be low. They argued for the SUNs to be included in the auction.
To make things a bit more complicated, the ‘credit event’ was confirmed after some of Ardagh’s bonds converted into equity, which is one of the arguments stated by Arini in its challenge of the deliverables.
Chronology of events
Chronology of events- Oct 7, 2025: Ardagh Packaging Finance completes a recapitalization, including a large swap of debt for equity and the issuance of new senior unsecured notes (SUNs) [source].
- Oct 21, 2025: The ISDA Determinations Committee is unable to confirm if a credit event happened and when – a rare occurrence. The decision is sent for external review [source].
- Dec 15, 2025: The external review panel unanimously concludes that a credit event indeed occurred, on 7 October 2025 [source].
- Dec 19, 2025: The determinations committee includes the SUNs in the ‘deliverables’ (the bonds included in the final settlement auction) [source].
- Late Dec 2025: Arini formally challenges the inclusion of the SUNs in the auction [source].
- Tresidor and Laurion, represented by Milbank, oppose the challenge [source].
- Arini answers this challenge [source].
- January 9, 2026: The determinations committee confirms the inclusion of the SUN in the auction [source].
- January 12, 2026: The determinations committee publishes an explained reasoning [source].
What to remember
The Ardagh process was unusual, (a) because the credit event could not be assessed by the standard rules-based approach and had to be referred to an external panel, and (b) because the choice of bonds included in the deliverables has been contested.
CDS are not bespoke insurance contracts, like house fire insurance.
Extending the analogy:
- Third parties may trade insurance on your house; the notional of CDS may be many times larger than the value of the property itself.
- A partial fire may not trigger insurance compensation. What qualifies as a fire is decided by rules and reviewed by the largest banks.
- A termite-infected garage may negatively impact the value of the property. The banks also decide whether the garage is included with the main dwelling.
- There is no damage assessor. The remnants of your property must be sold at auction to decide how much any insurer will pay to any insured.
- The banks organize that auction, through a complicated two-stage process.
- The entire valuation process is relatively recent, complex, and frequently criticized.
CDS are more complex instruments than they seem.
You must understand their process to assess their risks and benefits.
Rules can manage disagreements but cannot eliminate them.
Asdargh highlights many such difficulties. Its auction will become a textbook reference case for investors, risk managers and dispute professionals alike.
The CDS devil is in the deliverables.
References
- IFR, January 9, 2026: Ardagh controversy exposes CDS flaws | IFR
- Financial Times, January 9, 2026: Hedge funds battle over CDS of Coulson’s junk-rated Ardagh
- ISDA CDS Determinations Committee decisions and statements.: Ardagh controversy exposes CDS flaws | IFR
- Credit Default Swaps Antitrust Litigation, SDNY, Case No. 13‑md‑02476 (DLC).