Dana Corp.'s five-year credit default swaps widened to 2414 basis points last week, capping a 1144 basis point widening before the company filed for bankruptcy last Friday. On Feb. 21, Dana's five-year CDS was trading at 1270, but it spiked to 2270 Feb. 24 and widened to 2309 by last Monday, according to Markit. Its 7% '29 notes traded up to 69 from 65 1/2, while its 6 1/2% '09 notes traded up to 68 1/4 from 66 1/4, according to TRACE. A trader, commenting the day before the auto supplier filed, said that the bonds had been trading up because the market was estimating recovery rates on the notes in the 63-65 range.
The International Swaps and Derivatives Association is creating a protocol to cash settle Dana Corp.'s CDS trades. Kimberly Summe, general counsel for ISDA, said the protocol will be similar to Calpine Corp.'s protocol and will not include single-name CDS. The trade group is hosting a call with its members this week. Summe estimated that a protocol will be open for adherence the week of March 13.
The Dana protocol comes as ISDA works to do away with individual protocols. Last week investors chimed in on ISDA's draft proposal for a net physical settlement supplement that would establish a standard process for settling credit events. In a conference call held last Thursday, buysiders asked questions and critiqued the proposal. The most pointed comments came from an investor from PIMCO, who said buyside interests should be more protected in a formalized settlement procedure.
The PIMCO investor said the drafting of the net physical settlement procedure has excluded non-dealers from the calculation of a final settlement price. The draft proposes holding an auction after a credit event at which time a final price would be established for CDS trades based on bids and offers submitted by dealers. The buysider asked why investors were not involved in the calculation of a final price, pointing out that dealers have incentives that may not be representative of the concerns of the buyside.
He also pointed out that some buysiders may be forced to cash settle trades because the proposed auction process would eliminate trades that are less than $1 million. The buysider pointed out that the size of transactions that asset managers enter into are often much smaller than those of dealers, and that many buysiders will be forced to cash settle rather than take advantage of the net physical settlement procedure.
John Williams, a senior associate at law firm Allen & Overy who is working on the draft settlement, said the buysider brought up several good points and that the intention of the call was to obtain feedback from buysiders so that revisions can be made to the draft proposal. Williams explained that buysiders were not included in the working group that has drafted the settlement procedure because of practical considerations. Summe said ISDA will be making revisions to the draft based on the feedback from the call and new draft will be out in early April.
