Hi MJA
As I understand it the precedent is with Enron.
Enron like Lehman defaulted by becoming bankrupt even though the hedge was in strongly their favour. The Australian companies could have cancelled the hedge as Enron had defaulted but that would have still cost the Australian companies millions in penalties even though Enron had defaulted - forcing a cancellation would have ost the Australian companies.
So the Australian companies said that Enron was in default so we never have to pay anything but we are not cancelling-so we don't pay cancellation fees. The Australian court ruled in favour of the Australian companies. Since then the 2000 ISDA contract has been changed to clear up the ambiguity and give companies more power over what happens if companies like Enron and LBCC default by bankruptcy. So you would think the hedge is definitely dead.
The uncertainty is that the court case is in the US and US bankruptcy laws may trump the ISDA contract. I have no, none,zipo knowledge of US bankruptcy laws and what the US court is likely to do. If anyone has any idea it would be greatly appreciated.
Tomu
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