Fears about credit-default swaps wiping out when the underlying debt is restructured are overblown, according to some traders. The issue has moved the price of contracts relative to entities with the same rating, despite the cash asset being clearly deliverable under the new entity. "People are really spooked about succession issues," one trader said.
The cost of five-year default protection on British glassmaker Pilkington, for example, has drawn in more than 20 basis points to around 50 bps on CDS orphaning fears, since its takeover by Japanese company Nippon Sheet Glass was announced in June. This is despite the loan financing the purchase being clearly deliverable into the CDS, strategists said. "The moves have been violent enough for the first-time investor to be nervous," said one.
Jitters on the Street about this problem--termed CDS orphaning--have spiked because of an upsurge in corporate takeover activity in Europe (DW, 5/5).
