Morgan Stanley has started offering cancellable credit-default swaps giving holders the option to stop paying for protection after a succession event wipes out deliverable obligations. Cancellable contracts give protection buyers the right, but not the obligation, to cancel worthless contracts in exchange for a higher up-front cost, typically 5-10 basis points above non-cancellable protection spreads.
Officials at Morgan Stanley said a handful of investors have requested the contracts on potential leveraged buyout targets, but the contracts are not very liquid. They declined to name the credits on which cancellable CDS have traded.
Cancellable option CDS are the latest in a line of LBO-inspired credit protection instruments such as Citigroup's leverage-event swaptions, dubbed SAILS (DW, 12/21).
