WorldCom Credit Default Swaps Seen Biting RBC; Credit Head Is Out

  • 26 May 2002
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RBC Capital Markets has reportedly taken a hit on a credit default swap position on WorldCom and has let go its head of credit trading in New York, according to Derivatives Week, a Loan Market Week sister publication. Simon Howard-Glossop, head of credit, has left the firm, confirmed Paul Wilson, a spokesman in Toronto, declining further comment. A trader on the credit desk in New York declined all comment, as did Walter Gontarek, head of credit derivatives in London.

RBC is believed to have been active in trading credit protection on WorldCom, according to dealers and brokers in London. The company has at least $2.65 billion in outstanding bank debt, some of which is being reworked or set to expire. It could not be determined how much, if any, of the RBC's book offered protection on WorldCom loans. Credit protection on the troubled communications company blew out some 300 basis points in March after the Securities and Exchange Commission decided to probe its accounting practices (DW, 3/25). If RBC had been a net seller of protection prior to spreads blowing out the firm would be sitting on a market-to-mark loss, said market professionals. Five-year credit default protection on WorldCom was quoted at 1,500 basis points bid only, according to a broker in London.

The market for single name credit default swaps, unlike the cash market, is still relatively illiquid and transaction costs are large and therefore any attempt to unwind a losing position could move the market further against the buyer of credit protection, said a market professional. "Any prudent bank would get out now," he added.

One trader noted that RBC made a veiled reference to credit derivative losses in its second quarter results, which were released on Wednesday. In the statement RBC said, "The specific provision for credit losses was $328 million [Canadian dollars, equivalent to USD213 million]...The specific provision associated with a telecommunications account classified as impaired this quarter was partially offset by a $98 million [Canadian dollars, equivalent to USD63 million] gain on a related credit derivative." Another market professional commented, "If you have a loss and [its] only partially offset by CAD98 million, you're in serious trouble." It could not be determined by press time whether the losses on the telecommunications account in the second quarter results refers to a position in WorldCom.

  • 26 May 2002

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2 Goldman Sachs 2,096 5 12.39
3 Morgan Stanley 1,965 5 11.61
4 BNP Paribas 1,686 6 9.96
5 Barclays 1,565 4 9.25

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