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Derivatives

LBO Bids May Cause Flip In Index Roll Trend

As many as eight constituent names linked with leveraged buyouts are expected to drop out of the on-the-run investment-grade CDX index when it rolls in March and this could see the expiring index series buck an established trend by trading wider to the replacement series.

As many as eight constituent names linked with leveraged buyouts are expected to drop out of the on-the-run investment-grade CDX index when it rolls in March and this could see the expiring index series buck an established trend by trading wider to the replacement series.

"If eight names come out and are trading very wide and are then replaced by names into series eight that are much tighter you could easily have a situation where [series seven] trades flat or even wide to series eight," said Jimmy Kenny, head of CDS flow trading at Bear Stearns in New York.

So far, four names are expected to drop out of the index before the roll in March including Clear Channel, Equity Office Properties,Radio Shack andHarrah's Entertainment. "We are four names out and we are not even halfway through [this series], it's not inconceivable we will have seven, eight, nine names out before the roll. This could cause the first crack in tight spreads," said another credit trader.

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