U.S. airlines, such as American Airlines and United Airlines, are expected to be the most active names in the credit-default swap market when trading returns to normal levels. Credit-default swap traders said spreads for five-year protection on American Airlines jumped to 410 basis points from about 210 basis points last Monday. The airline industry faces USD370 million a day in lost revenues through grounding their services. The loss will also have a negative impact on the companies' credit worthiness, which will cause spreads to widen further.
Swap trading last Thursday was extremely light with credit-default swap spreads in other industries widening 15-25bps on average. Traders compared the flow to levels they traditionally see on a day before a national holiday. Autos, such as Ford Motor Credit and General Motors Acceptance Corp., and investment banks, such as Lehman Brothers, were the most heavily traded. Credit-default swap spreads on GMAC widened from 96 basis points last Monday before the World Trade Center collapsed to about 120 basis points last Thursday. Lehman Brothers widened from 67bps on Monday to 82bps on Thursday. "These credits always trade no matter what. But no one is trying to make money. They're just looking to square up," one trader said. Indeed, a trader at Bear Stearns said the firm "wasn't looking to make money out of disaster," adding that default swap traders were working to safeguard the firm's assets and consult with clients. The major players last Thursday were investment banks. Traders speculated that when credit-default trading resumes to its usual levels, spreads could widen by as much as 30-40 bps across the board.
Source: J.P. Morgan Chase Charima@chase.com
