## Facts

- Bear Stearns Investment Limited loaned money to Escobel Land, Inc. for a condominium project in the Philippines; repayment was supported by a surety bond issued by the Government Service Insurance System (GSIS), a Philippine government agency.
- Bear Stearns entered into a credit default swap (CDS) with Aon Corporation that named GSIS as the reference entity; GSIS’s failure to pay on the bond constituted a credit event under that CDS.
- Aon entered a separate CDS with Société Générale (SG) to obtain protection for itself; this CDS named the Republic of the Philippines as the reference entity and defined a covered “Credit Event” by reference to a “Sovereign Event.”
- Escobel defaulted; GSIS refused to pay on the surety bond, asserting the bond was improperly authorized.
- In separate litigation, a court held GSIS’s refusal to pay was a credit event under the Bear Stearns–Aon CDS, triggering Aon’s payment obligation there.
- Aon then sued SG for breach of the Aon–SG CDS, seeking a $10 million payment on the theory that GSIS’s nonpayment (and the earlier judgment) established a “Credit Event” under the sovereign-referenced CDS.
- The district court granted summary judgment to Aon; SG appealed.

## Issues

1. Whether GSIS’s refusal to honor its surety bond constituted a “Sovereign Event,” and thus a “Credit Event,” with respect to the Republic of the Philippines under the Aon–SG CDS.
2. Whether the prior judgment finding a credit event under the Bear Stearns–Aon CDS (with GSIS as reference entity) required or effectively established a “Credit Event” under the separate Aon–SG CDS (with the Philippines as reference entity).

## Decision

- The Second Circuit reversed the district court’s grant of summary judgment for Aon.
- The court held Aon failed to show that a “Sovereign Event” (and therefore a “Credit Event”) occurred under the Aon–SG CDS based on GSIS’s nonpayment.
- The court held the prior Bankers Trustee judgment under the Bear Stearns–Aon CDS did not determine whether the distinct Aon–SG CDS was triggered.
- The result relieved SG, on the summary-judgment record, from the $10 million payment obligation imposed by the district court.

## Legal Principles

- CDS contracts are interpreted as independent agreements according to their defined terms, including the specified reference entity and credit-event definitions.
- A CDS referencing a sovereign does not, without clear contractual language, treat defaults or nonpayment by a government agency or instrumentality as a sovereign credit event.
- A finding of a “credit event” under one CDS does not automatically establish a “Credit Event” under another CDS covering different reference entities and different trigger definitions.
- Courts will not rewrite a CDS to function as a perfect hedge where the contract text allocates risk differently.

## Conclusion

The Second Circuit held that a sovereign-referenced CDS was not triggered merely because a government agency refused to pay on its bond and because a different CDS litigation found a credit event; absent explicit contract language attributing the agency’s nonpayment to the sovereign reference entity, SG had no obligation to pay under the Aon–SG CDS on summary judgment.


Aon Fin. Prods., Inc. v. Société Générale, 476 F.3d 90 (2d Cir. 2007)