How Does a Debt Restructuring Trigger a CDS Payout?

A debt restructuring can trigger a CDS payout if it qualifies as a credit event under the contract's terms, typically based on ISDA definitions. This usually occurs when the terms of the debt are changed in a way that is unfavorable to the creditors, such as a reduction in the principal or interest rate, a postponement of payment dates, or a change in the seniority of the debt.

For the CDS to be triggered, the restructuring must be legally binding on all bondholders and not just a voluntary agreement. The specific terms defining a restructuring credit event can vary by jurisdiction.