CDO Activity Narrows Credit-Default Swap Spreads
Firms selling protection to structure synthetic collateralized debt obligations caused credit-default swap spreads on high-grade names to grind tighter on Wednesday morning. Traders said that there were at least two deals, Merrill Lynch's Nationwide Building Society CDO and one from BNP Paribas. The Merrill Lynch deal is a synthetic balance sheet CDO referenced to Nationwide's EUR1.4 billion (USD1.38 billion) bond investment portfolio (DW, 4/28). The average credit rating on the deal is A3/BBB plus. Officials at Merrill declined comment and officials at BNP Paribas did not return calls.
Traders were tipped off to the CDO activity because of the breakdown in the correlation between the equity markets and the credit-default swaps market. On a day when the equity markets were down 2-3% in London during the morning, it was unusual to see sellers of protection active in the market, one trader explained.
Five-year protection on names such as Royal Philips Electronics, Nokia Corp., Lafarge and ThyssenKrupp tightened Wednesday morning. Mid-market credit-default protection on Philips came in to 138 basis points over LIBOR from 143bps while protection on Nokia tightened to 111bps from 116bps. Swaps on Lafarge narrowed to 115bps from 120bps, while protection on ThyssenKrup tightened to 210bps from 200bps.