A market for credit-default swaps on leveraged loans is expected to emerge this year in Australia as an alternative to traditional CDS on local corporate debt. Straight CDS on local names have pulled in so much in the last year, there's strong interest in higher-yielding alternative instruments.
"This is being widely talked about so it's definitely being worked on in the background," said a senior credit trader at a European house in Sydney, noting he anticipates the first few trades to hit the market in the coming months. "There is potential here," said a trading head at a bulge bracket house. "It's coming along in Europe and the U.S. and has applications for this market." Credit officials said interest should emerge on higher-yielding underlying such as leveraged loans from small or medium-size companies. Global CDOs on leveraged loans incorporating Australian names are also expected to develop.
Traders noted domestic CDS price at tight levels due to continued strong one-way interest for Aussie names in global CDO portfolios, while domestic trading remains limited. For example, credit dealers noted hardly any credit spread movement and no reactionary trading on the news of a planned bond issue by Quantas Airways. "A year ago there would have been at least a 5-10 basis point move," said the senior trader.
