Bulge bracket investment firms, including Salomon Smith Barney and JPMorgan, caused credit protection on WorldCom to widen as they sought to buy protection on the telecom giant in the wake of the Securities and Exchange Commission's probe of the firm's accounting practices. "I wouldn't call it frantic buying, but the usual investment firm suspects were very active," said one trader in New York. Officials at the firm's declined comment.
Traders said trading volumes were nearly double a normal week. "We saw some big trades from the investments banks that were trying to cover positions for their clients. Some of the trades were for over USD25 million which is far from normal," another trader said. The market convention is USD10 million per ticket.
Firms were buying protection as a way to hedge their credit facilities, said another trader. WorldCom's credit spreads started widening around March 14, the day after reports that the company was being investigated by the SEC. The news caused five-year credit protection on the company to blow out nearly 300bps. Protection on WorldCom rose from about 350bps on March 13 to as high as 550bps the next day. Spreads were hovering around 535bps last week.
