The auction to cash settle credit default swaps referencing the defaulted bonds of Dura Operating Corp., which for the first time included single-name CDS, was successfully completed last week. The price for Dura's senior 8 5/8% '12 bonds was fixed at 24.125%, while the subordinated 9% '09 bonds were fixed at 3.5%.
A source close to the auction said it went smoothly and that dealers received few complaints from investors. Three-hundred and twenty-seven parties adhered to the protocol. Auction prices were reasonably consistent with the price the bonds were trading at before the auction, which investors cited as evidence of its success. Dura's senior bonds were trading at 25 the day of the auction, while the subordinated bonds were trading at 4. The bonds fell 1 1/2-2 points after the auction results. A Dura spokesman did not return a call seeking comment.
The cash settlement procedure greatly diminished the technical demand for Dura bonds post bankruptcy, wrote high-yield research firm KDP Investment Advisors in a report. By including single-name CDS, the International Swaps and Derivatives Association, which publishes the protocol, hoped to avoid a short squeeze on bonds resulting from investors buying bonds to physically deliver into CDS contracts as was the case with Delphi Corp. (CIN, 10/21/05). "One thing a lot consider important is where the bonds end up after the auction compared to where they were trading," said the source. There was only a slight short squeeze on Dura bonds after it filed for bankruptcy from investors buying bonds for physical settlement (11/1).
In addition to single-name CDS, index trades, bespoke collateralized debt obligations, constant maturity CDS and recovery locks were included in the protocol. Previous protocols have included only cash settlement of index and tranche trades. Dura is the seventh corporation for which a cash settlement process has been held. Others include Collins & Aikman, Delta Air Lines, Northwest Airlines, Delphi Corp., Calpine Corp. and Dana Corp.