Sydney-based hedge fund Basis Capital is considering entering an asset swap in the coming months as part of a convertible bond arbitrage strategy on Singapore's Chartered Semiconductor Manufacturing. The corporate is trading at around 650 basis points over the swap curve, according to Steve Howell, cio in Sydney. He added that he expects the converts to tighten to around 500bps in the coming months. Howell attributes the temporary widening to part of a general credit spread widening since the Sept. 11 terrorist attacks in the U.S. It will likely enter the trade within three to six months if credit quality stabilizes and the credit risk premium narrows.
"What's interesting [with Chartered Semiconductor Manufacturing] is the equity option," Howell said. He added that the underlying equity's implied volatility is now around 30% while it has historically been around 50%. By using the asset swap it isolates other risks, such as interest-rate and credit risk, and is left with exposure to the equity option.
The fund's prime broker is Merrill Lynch. Howell declined to comment on potential counterparties for the trade. R.G. Rosso, spokesman at Merrill in Hong Kong, did not return calls by press time.
