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Derivatives

Canadian Leveraged Tranche Deals Drive Index Tightening

Spreads on the super-senior tranche of the investment-grade CDX credit derivatives index pulled in to new tights this week as Canadian conduits sold protection on leveraged super senior tranches.

Spreads on the super-senior tranche of the investment-grade CDX credit derivatives index pulled in to new tights this week as Canadian conduits sold protection on leveraged super senior tranches. Credit-default swap spreads on the 10-year 30-100% tranche traded at 3.375 basis points Tuesday, from 4.125 bps when the index started trading last month, and seven-year protection traded at 2.5 bps. Analysts said the tightening was driven primarily by conduits selling LSS protection now that some banks have gotten ratings agency approval (DW, 8/4). "There was a pipeline of deals waiting for approval last month," said Madhur Duggar, credit derivatives strategist at Barclays Capital in New York. "Now these transactions are getting approved." Analysts said there has been a significant pickup in leveraged super senior transactions in the past month, but declined to specify volumes.

Mark Adams, president of Skeena Capital Trust in Toronto, which issued a deal late last month, declined to say whether spreads now are too tight to continue issuing, but said it can be dangerous to issue when spreads are tight. "If you issue when spreads are tight and spreads widen, you lose a great deal of opportunity," he said. "The issue is the opportunity cost. It's a balancing act because you can miss out on that opportunity if you issue too hastily."

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