Credit derivatives traders have started to quote the price of protection on low-credit quality names in terms of an up-front premium rather than a spread over LIBOR for the term of the contract because of deteriorating credit quality. This is preferable to the sellers of protection because if the credit defaults early in the contract the seller has already pocketed the premium, according to Cameron Munro, European head of credit trading at National Australia Bank in London. Munro added, "What's the point of getting a 1,000 basis points if you are only getting it for a week?"
The new price amounts to the same as adding up the spreads over the duration of the protection and charging them as one up-front premium, according to Munro. Five-year credit-default swap protection on Marconi, rated BB by Standard & Poor's and Ba3 by Moody's Investors Service, was quoted at between 30-40 cents on the dollar last week, which traders said is equivalent to approximately 2,500bps under the previous pricing system. Invensys (BBB/Baa2) is the only other credit that has started to be traded as an up-front premium. But some traders expect other companies such as British Airways (BBB minus/Baa3) to join them as credit qualities across sectors deteriorate.
