Trading on credit-default swaps referenced to Enron and Dynegy dried up last Thursday as Dynegy appeared to be moving closer to acquiring a stake in its struggling rival, according to traders. Trading volumes on Enron, which just a few weeks ago was trading every day, was non-existent as the acquisition talks intensified, said traders in New York. "There's no flow at all. The only thing we're seeing is firms' unwinding previous trades," said one trader. Most of this business came from hedge funds that had previously bought protection. Another trader said "it's hard to offer protection on risk that's just hanging out there." Trading flows on Dynegy, which were already thin--averaging about one trade every three months--followed the same path as Enron.
Traders said there is too much uncertainty surrounding the companies, such as the Securities and Exchange Commission's investigation into Enron.
Meanwhile credit-default swap spreads on the companies took opposite routes. Spreads on Enron, which last week widened to more than 1,100 basis points, tightened to about 1,000bps on news that it might be acquired. Meanwhile credit-default swap spreads referenced to Dynegy widened to more than 300bps from about 120bps a week earlier as investors moved to buy protection.
