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Derivatives

Bankruptcy Swaps Mart Expected To End With Enron

Enron's contribution to the credit derivatives market--bankruptcy swaps--likely will die off if the power company files for bankruptcy, according to London-based credit derivatives traders. "Bankruptcy swaps was something it set up and something it wanted to make big, but it never really took off," noted a trader in London. "Bankruptcy swaps was something they set up and look where they are now," he added. Enron's European operations were placed into administration Thursday and Alex Parsons, spokesman in London, declined comment.

Most derivatives houses have exposure to Enron Credit but none will be particularly hard hit because Enron Credit was not a major counterparty due to a lower credit rating than most market makers. Before a spate of recent downgrades that culminated in junk status last week, Enron was rated Baa1 by Moody's Investors Service and BBB plus by Standard & Poor's. Also, firms started to cut credit lines several weeks ago (DW, 11/4). However, the looming default was creating a ripple effect in the credit derivatives markets last Thursday. The single-name default market widened by around seven basis points across the board on Enron-related selling. "Enron happens to be in a lot of synthetic collateralized debt obligations, because there's not a lot of other oil and gas names and it has good recognition," said one trader. That should create some short-term weakness in single-name default swaps as traders take profits from the recent tightening trend.

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