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Tesoro Petroleum's bank debt has fallen from the low 90s to 84-85 1/2, with a few small trades taking place in that range. The company is currently in negotiations with its lending group to amend its bank covenants. One trader suggested that the bank group was looking to take out all its existing covenants and replace them with minimum EBITDA and maximum capital expenditure clauses. Market players predicted that levels would continue to slide. "I think that it's going to march its way to the down into the 70s. There's just too much debt there," one trader said. Calls to Gregory Wright, cfo, were not returned.

This week's Guest Column was written by a derivatives lawyer in London who wishes to remain anonymous.

Risk And Return In Intrinsic Time

U.S. dollar/Canadian dollar risk reversals flipped last week as the greenback appreciated against its Canadian counterpart and investors bet that, for the short-term at least, the dollar will remain strong. Twenty-five delta risk reversals shifted to 0.15 vol in favor of dollar calls/Canadian puts from 0.15 vol the other way around. The dollar rose to CAD1.585 Thursday from CAD1.56 Monday in New York.

Merrill Lynch is gearing up to issue a capital guaranteed product in Hong Kong that employs look-back resetting cliquet options and plans to sell the structure through the Bank of China and its associate banks, along with Bank of America, Standard Chartered Bank as well as its own branches. John Robson, director of structured products in the global equity markets group in Hong Kong, said Merrill recently issued the first such structure in Hong Kong and plans to link this one, its second, to a basket of Chinese stocks. The note is expected to be issued in late November.

Luc Faucheux, a senior interest rate options trader at CDC IXIS Capital Markets North America, has joined Salomon Smith Barney as v.p. in fixed-income derivatives research. "The idea was to bring someone in with a strong quant background, but also someone with trading experience, to have someone who can better understanding trading issues and come up with more practical ideas," said Yann Coatanlem, head of fixed-income derivatives research at Salomon in New York. Faucheux had previously been a quantitative analyst at what is now Mizuho Bank.

Swiss Re Financial Products has structured a bespoke forward-starting weather derivative for Petro, the heating oil subsidiary of Star Gas Partners. Bill Windle, senior v.p., weather derivatives at Swiss Re in New York, said Swiss Re is able to offer rolling strikes and a longer duration than normal, in this case for four years, because as an insurance company it is better able to mitigate and warehouse risk.

Grand Cathay Securities, a securities house in Taipei, is planing to make its first investment in synthetic collateralized debt obligations and first-to-default baskets in the coming months. It is also looking for firms to structure credit-linked notes, which it can then sell to its clients. Amy Chang, head of fixed-income, said the securities house is considering investing more than USD20 million in the instruments to boost the return of its USD60 million fixed-income portfolio. Bankers are eager to get the business. "I'm very keen to give them a call now," said one credit derivatives marketer.

Singapore's United Overseas Bank is considering structuring a USD1.33 billion managed collateralized debt obligation before year end. "We're considering doing at least one more transaction this year," said Tay Teck Chye, director of global treasury at UOB in the Lion City. The firm issued a co-structured deal with Deutsche Bank last week. The firm will go ahead with the deal unless the market collapses.

"This is not a drop in the volume of swaps executed by banks, this is an increase in the overall market."--Jérôme Camblain, European head of sales for fixed income and derivatives at Bear Stearns in London, commenting on a draft version of the latest British Bankers' Association credit derivatives survey. For complete story, click here.

National Rural Utilities Cooperative Finance, a financial cooperative with more than USD20 billion in collective assets, has entered interest rate swaps on the back of a USD1.25 billion bond offering it sold recently. John Suter, assistant treasurer in Herndon, Va., said the cooperative raised the cash through a seven-year fixed-rate offering and entered three separate swaps to convert the liability into a synthetic floater and maintain 40% of its portfolio in floating-rate.

Credit-default protection on Verizon Communications and its subsidiary Verizon Wireless tightened last week amid growing speculation that the Federal Communications Commission will allow wireless operators to pull out of a nearly USD16 billion sale of licenses. Five-year protection on Verizon, the U.S. local phone company, tightened by roughly 70 basis points Thursday while protection on its wireless unit narrowed by about 100bps, according to traders in New York. The parent tightened to roughly 270bps Thursday from 340bps the previous day, while the less-liquid Verizon Wireless tightened to 340bps from about 440bps.