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news and analysis of the global credit derivatives market

Credi

ux
ux
 

I June 2.006

Issue S8

Deerfield leads race to launch credit DPC page 3

 

New industry takes shape

Unwind fears spook loan-only market page 5

 

New docs set to boost volumes

ACA plans IPO

page 6

CDO manager eyes ABX push

 

Dealers push through

CDS of CDO docs

page 7

Isda resolves write-down squabble

 

Asia logs first~to-

default first

page 8

Regional high-yield market grows

 

Isda warns ruling could chill CDS market page /0

Tradebbdy lobbies appeal court

Market awaits surge of

loan synthetics

page /5

Dealersplarl new trades

WsQ·launcheslong/

 

short synthetic

page /6

Manager targets LBO names

 

Deerfield hires.from

Henderson

page 29

CDO manager opens in London

 

Watching the Fed page 3/

End view: Citigroup Fixed Income Alternatives Group

Omicron builds CDO

team

page 32

ExcUniqagroupnabs CDO

 
3/ End view: Citigroup Fixed Income Alternatives Group Omicron builds CDO team page 32 ExcUniqagroupnabs CDO

Dealers abandon net

physical settlement

The credit derivative market's grand project to introduce net physical set- tlement of credit events appears to lie in tatters this month. Instead, Isda is preparing a new expanded version of the cash set- tlement mechanism that is already in use. This comes after attempts to draft documentation for net physical settlement hit a brick wall. The about-turn will result in market order-style cash settlement auctions being brought under the 2003 credit derivatives definitions. When that happens, it will become mandatory to settle credit events on all new contracts using the auction concept first developed to settle the Collins & Aikman default. Says Jim Hill, an executive director in the structured credit products group at Morgan Stanley in New York: "We believe there is a growing consensus among deal- ers and clients and Isda that if the [expanded] cash settlement auction process works, there is no reason to go to net physical settlement. It is overly cumbersome, can force people into phYSical settlement that don't want it, and requires a long time to put in place. The cash settlement process is better on all three counts." Adds Hill: "The new process, once finished, will be mandatory for all new trades including index, tranche index and single-name CDS. For existing trades, we will have to persuade counterparties to opt into the process." During the trial period, market participants will have the choice of whether they opt for the auctions or not. Isda says that the protocol will be used on that basis for at least one or two credit events. An Isda spokesperson says that the association is committed

to focusing on the solution that the market wants. But one senior credit derivatives trader sums up the pic- ture more forcefully: "Net physical settlement is dead," he says. The net system is regarded as a conceptually elegant solution to the problem of how to settle credit events without creating a self- defeating squeeze in the underling bonds. But it is not a solution that has stood up well to harsh scrutiny. The process makes use of a cash settlement auction, but only after a complex netting procedure has taken place to produce the physical settlement portion. Morgan Stanley has been among the more vocal supporters of an expanded cash settlement auc- tion, according to bankers involved in the regular weekly conference calls on credit fixings. JP Morgan and Deutsche Bank are reported to have argued most strongly for net physical settlement. However, according to dealers, it was when banks began hearing back from their hedge fund clients that major cracks started to appear in the net physical settlement plan. The central depository - which matching and settlement house DTCC has been building inde- pendently of the net physical set- tlement initiative - is a basic plank of the mechanism. But serious concerns emerged over how long it would take to build. In the mean- time, many funds have become im- patient that single-name trades are still excluded from credit event fix- ings. They say it introduces basis risk to their index-versus-single-name positions. Dealers say the new protocol should be ready by September or October. EVAN HAGGER

Credit

FISHKNIFE FIS

Credit FISHKNIFE FIS Keep it simp Around six years ago - when nobody was very keen

Keep it simp

Credit FISHKNIFE FIS Keep it simp Around six years ago - when nobody was very keen

Around six years ago - when nobody was very keen to invest in credit default swaps - insurance companies were the great hope of the credit derivatives market. But at the time people feared that the different view of risk and docu- mentation in these two spheres of the financial universe would lead to disputes. Will they pay up was the question the bankers asked about the insurers that were taking on credit risk for their underwriting books. Will they try to dump their bad loans on us based on insider in-

formation, was the insurers' big fear. SG must wish it had never trad- ed a credit default swap with one insurance company, Aon (see page 10). But in this case the usual bank- insurer relationship is reversed. SG was the one crying foul after Aon,

the buyer of protection,

default on a contract referencing the Republic of Philippines. Now, as anyone vaguely famil- iar with emerging market credit knows, the Philippines has not de- faulted in recent times. So the court case that has recently come to light seems to confirm the old suspicion that insurance companies don't quite get the point of credit derivatives. What is more surprising is that the company succeeded in persuad- ing aNew York court that it could treat a contract written on senior unsecured government debt as an insurance policy for a Philippine insurance agency surety bond. How, to paraphrase Isda's sub- mission to the appeal court, could the original judge fail to notice that the credit default swap contract spells out the need for the protection buyer to deliver an eligible bond? In fact, there is a very good rea- son that a court could get confused. The confirms and definitions used in the credit derivatives market are utterly bewildering to any outsider. And Isda, as the body that brings together dealers and users to create these contracts, bears a large share of the blame for this state of affairs. It is true that concepts such as 'borrowed money', 'not contingent' and 'deliverable obligation char-

triggered a

acteristics' have precise meanings. But most people outside thw magic circle of derivative lawyers are clue- less about them. Many a trader has successfully traded credit derivatives without really understanding the difference between reference obliga- tions and deliverable obligations. And credit derivative docu- mentation seems to be getting more complicated. Credit default swaps on asset-backed securities, for ex- ample, introduce a barrage of new concepts, such as 'interest shortfall reimbursement payment amount' and 'additional fixed payment event'. Derivative lawyers argue that the fiendish complexity of credit derivative documentation simply reflects the complex nature of the underlying risks. But this is not entirely true. Plenty of terms are un- necessarily confusing. Take the provisions for con- stant maturity credit default swaps published last year, for example. In these trades, the protection buyer is known as the fixed rate payer (even though payments in these trades float in line with current spreads), and the protection seller (the coun- terparty who actually receives the floating payments) is known as the floating rate payer. Or consider the credit event the market knows as modified restruc- turing. In the documentation, this is called 'restructuring with maturity limitation and fully transferable obligation'. Meanwhile, modified modified restructuring is officially called 'modified restructuring with maturity limitation and condition- ally transferable obligation'. The main reasons for these drafting failures are that dealers were unable to put aside their dif- ferences and agree on simple terms, and that traders quickly got bored and left the final documentation discussions to their legal colleagues. That has left the credit deriva- tives market with documentation that is intimidating to potential new users. That is bad. Even worse, it could be unenforceable because the courts can't understand what the contract was meant to achieve.

Credi~ux is published monthly by Cl"edi~ux Ltd, 63 ClerkenwellRoad, LondonECIM 5NP, UK +44(0)2072539510

Credi~ux

is published monthly by

Cl"edi~ux Ltd,

63 ClerkenwellRoad, LondonECIM 5NP, UK

+44(0)2072539510

mail@creditflux.com

www.creditflux.com

63 ClerkenwellRoad, LondonECIM 5NP, UK +44(0)2072539510 mail@creditflux.com www.creditflux.com 2 I June 2006

NEWS.

NEWS. Credit Deerfield leads race to launch credit DPC A new vehicle set up by Deerfield

Credit

Deerfield leads race to launch credit DPC

A new vehicle set up by Deerfield Capital Manage-

ment is widely expected to be the first of a wave of new triple-A rated risk-taking entities in the credit market. As many as a dozen of these so-called credit derivative product companies are in the market, with many other institutions and individuals still at an exploratory stage. Structured credit specialists calculate that this in- flux of capacity into the credit derivatives market could have a marked impact on the spreads of certain assets. "If only half of these planned companies make it out of the starting gate this is going to dramatically change the structured credit landscape," says one close observer of the sector.

Although there are only two credit DPCs currently

in existence - four-year-old Primus Guaranty and

Athilon, which was set up at the end of 2004 - some of the different characteristics of this new breed of compa- nies are starting to emerge. There are a number of quite different business strategies involved which, for the most part, participants are willing to discuss only in private. Each of these models has its benefits and drawbacks in terms of expected returns, risk profile and likelihood of achieving triple-A ratings. One of the crucial distinctions is between credit

DPCs with a bank sponsor and those that rely entirely on their capital models to preserve their rating. Among those in the first category are a vehicle Deutsche Bank is setting up headed by former MML Assurance and Chubb Financial Products head Matthew Cooleen; and Pallium Finance, a company being set up by Bank ofMontreal and two former Merrill Lynch executives Flavio Bartmann and Conrad Voldstad. Deerfield's vehicle, which is thought to have already received letters of intent to rate from at least one rating agency, is an example of a standalone company, as is Aladdin Credit Products, a vehicle being assembled by CDO and hedge fund manager Aladdin Capital Man- agement. The Deerfield vehicle, Deerfield Financial Prod- ucts, is one of the few credit DPCs in the pipeline that follows Primus's model of investing in single-name corporate credit default swaps. Officials involved in the emerging sector point out that a single-name strategy plays to the strengths of a fundamental credit specialist such as Deerfield, which can make use of an established team of credit analysts. However, a disadvantage is that it adds operational costs, since it requires more people working in research,

analysts. However, a disadvantage is that it adds operational costs, since it requires more people working

Credit

NEWS

Credit NEWS trade processing and risk manage- ment. Privately owned Athilon, which invests in tranches rather
trade processing and risk manage- ment. Privately owned Athilon, which invests in tranches rather than
trade processing and risk manage-
ment. Privately owned Athilon,
which invests in tranches rather
than single names, is thought to op-
erate with a staff of only a handful
of people. Primus, by contrast, with
its $13 billion single-name portfolio
written on more than 500 names,
had a headcount of 35 at the end of
last year.
One of the most interesting
credit DPCs in the works is that
being worked on by Bear Stearns
Asset Management. This is thought
to be the only example of a DPC
that will invest in asset-backed se-
curities. Plans for this company are
thought to be well advanced, but it
is not expected to be among the first
of the current crop of vehicles, since
its target investments make it harder
for the rating agencies to rate it.
Bear Stearns Asset Manage-
ment is understood to have hired
Jeremy Reifsnyder from monoline
insurance company CIFG to head
up the new venture, although the
company declines to confirm this.
Another new vehicle which is
reportedly close to launch is being
set up by two well-known struc-
tured credit bankers who recently
left the sell side. Walter Gontarek,
formerly credit products head at
RBC Capital Markets in London,
and Charles Colbourne, who until
last year was global head of credit
structuring at TD Securities in
London, are understood to have
teamed up to launch a company
known as Channel.
This standalone DPC is ex-
pected to target super-senior credit
tranches, though with somewhat
more conservative structural lev-
erage than seen in Athilon, the
only existing credit tranche DPC.
Sources who have seen Channel's
business plan say it aims to provide
good equity returns even if senior
spreads tighten significantly from
today's levels.
That is partly because of its
capital structure, which borrows the
two-tier capital note model recently
used in a number of structured
investment vehicles (SIVs). Like
Athilon, Channel should be able to
benefit from a lighter operational
infrastructure than seen in single-
name DPCs such as Primus.
All of those involved in the sec-
tor acknowledge that the biggest
hurdle to bringing a new credit DPC
to market is not finding investors
but securing ratings. The companies
need to convince the rating agencies
not only that their capital models are
robust enough to support a triple-A
rating, but that they are staffed and
backed by people who are commit-
ted to maintaining a triple-A rating.
"They need to pass the sniff test,"
says one individual involved in the
sector, who believes that many of
the hedge fund managers currently
looking at the DPC space will fail
to convince rating agencies of their
long-term commitment.
One likely impact of the emer-
gence of the credit DPC sector is
to make it harder for new SIVs to
get up and running. Both SIVs and
DPCs are mainly buy-and-hold
investors that rely on capital models
for their top-tier ratings. One key
difference is that SIVs actively man-
age their liabilities as well as their
assets, using the short-term com-
mercial paper and repo markets for
funding.
Another difference is that when
a SIV hits trouble it can be forced
to unwind its portfolio of assets,
whereas ifDPCs are forced into a
wind-down state this means that
their portfolio is frozen until ma-
turity. As a result, investors in the
junior liabilities ofDPCs face less
risk oflosses because of a firesale
of assets than do SIV capital note
investors.
They are also less reliant on the
liquidity of the commercial paper
market, since DPCs issue term
funding. The business of arranging
DPCs' mezzanine and senior debt is
also becoming an increasingly com-
petitive one, with several CDO ar-
rangers seeing this as a logical area
to move into. Lehman Brothers
and Credit Suisse are among the
emerging leaders in this area, with
Credit Suisse thought to be arrang-
ing Deerfield Financial Products'
debt financing, Deutsche Bank sell-
Short form
Pioneer Investments
bUyS CDO manager
Specialist credit asset manager
Vanderbilt Capital Advisors
has sold itself to US mutual fund
manager Pioneer Investments,
which is in turn owned by Italian
bankUnicredito Italiano. Van-
derbilt, which was owned by its
employees, has around $13 billion
of assets under management and
is based in New York.
Vanderbilt is one of the biggest
managers of cashflow CDOs, with
around 10 deals under manage-
ment including the recent Burn-
ham Harbor CDO I. All its CDOs
are backed by asset-backed securi-
ties. According to Pioneer Invest-
ments, Vanderbilt has around $13
billion under management in total.
It will continue to operate asa
separate business within Pioneer
Investments, led by president
Emad Zikry; .
Mana.ger launchE!~
Ustedeqldty .
t.rallche··vehicle
ALondon-based·investment
manager,Oc;eanCapital
Associates,. has launched the
latest example of a listed; c1osed_
ended •.vehicleJQrinvesting.in
n
.••.•
junior. structuredfinance~tranches.
.The company, European Equity
Ttancht\Jncome,begantrading
on the London Stock EXchange at
the end ofApril after ra.isfr'lg€IOO
million of equity; Its focUs issinii"
lartoCheyne Capital's Queen:s
Walklnvestmentwhi(;h was
launcheda.hhe end of lastyea.r.
.•
Correction:
TradeWeb
.
-
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-
.
-'
InthefMayissue ofc:rediyzux,
We· said·.tha'telectronic·trading
platf()rrTl,.~omsonTrl1deVVeb.
offerS a.tradingtool .•calle(jSvyAP-
tracker,aspa~t:cifitscreditde- .
riY~t:iyesll1arketplace.••lnfact,t~l:J.
tooJewasrec~ntliTepl.ace.~.gy;a
rebrandedtrade .•ll)anag~lTIenttool
calledTRAD~tra.cker
Applogles.

NEWS·

ing the debt of its own new vehicle and Lehman Brothers working on a number of credit DPC mandates including the Bear Stearns Asset

~anagementcompan~

~ICHAELPETERSON

Unwind standoff threatens loan-only market

The availability of cash unwind prices has emerged as a key obstacle to the development of the loan-only credit default swaps market, accord- ing to buy-side traders, as the credit derivatives market gears up to trade credit derivatives written on lever- aged loans. Dealers are predicting that a market in North America will take off, following the introduction of a standard template for trading single names and that Isda docu-

template for trading single names and that Isda docu- mentation is due to be published imminently.

mentation is due to be published imminently. In Europe, trading has been under way for some time, despite reservations from hedge funds about features designed to encourage involvement by bank loan portfolio managers. Credit hedge funds on both side of the Atlantic are hoping cash un- winds will become a standard part of trading. Reversing a credit default swap position can be done either by find- ing a price for a cash unwind, or by entering into an equal and opposite trade. For active mark-to-market investors such as hedge funds, cash unwinds are usually the preferred option, partly because they gener- ally do not want to manage lots of offsetting transactions. However, the fact that lever- aged loans are callable at any time, and that they make mandatory pre-

Credit.

payments from excess cashflow and asset sales, raises obvious challenges for calculating cash unwinds. Hedge funds that are trading leveraged loan credit derivatives in the European market confirm that cash unwind prices are generally not available there. "Dealers will not provide you with an unwind price, only an offsetting transaction," says a long-short portfolio manager. "The contract is callable, so dealers don't know how long the transaction is going to last. They don't really want to give you a valuation." There is also uncertainty over whether unwind prices will be read- ily available in the North American market. Unlike the standard way of trading leveraged loan single-name default swaps in Europe, the North American contract is non-callable. However, cash unwind calculations

As a Fund Manager, new regulations entin structured finance securities mean I have to make
As a Fund Manager, new regulations
entin
structured finance securities mean
I have to make sure ourCfholdings are
marked-to-market on a regular basis.
Standard & Poor's new viluation service
gives us timely and independent opinions
of prices, that help us reveal the value
'\
of our portfo~io.
Structured Finance Secur,ities Valuation

Credit

NEWS

are still problematic, due to the high prepayment rates associated with leveraged loans. If the loan amounts are reduced to zero, the credit de- rivative contract is terminated. North American traders say that the risk of that happening is lower than in Europe, as the credit derivative contract trades on a class of assets. In the European market, trading has gravitated towards a single reference obligation-only con- tract. However, questions remain over the suitability ofloan credit derivatives for cash unwinds, even in the US. Says Jeff Kushner, head of exe- cution at credit investment manage- ment firm, BlueMountain Capital Management: "Calculating the unwind, you need to calculate what the curve looks like, the recovery value and the duration of the trade. But there's the question of what the duration is. In North America there is somewhat less uncertainty, as the loan credit default swap will trade on a class of assets, and therefore is less likely to be early terminated." One view is that North Ameri- can dealers will move towards pro- viding an unwind price based on the maturity of the asset. Meanwhile, in Europe, the relationship between trading on spread and trading on price remains murky, according to some hedge fund traders, due to the strong in- fluence of bank loan portfolio man- agers on the market. "The thrust is to make it as much as possible so that every con- tract is a par contract," says a hedge fund portfolio manager. "That is for accrual-accounted clients. Dealers don't want to trade on price in case the banks that they have persuaded into the contract [because it is a spread-based net interest expense item] change their minds." Booking loan protection buy- ing through net interest expense accounts requires cashflow recogni- tion, but not marking to market - which is anathema for banks booking loans at par. However, despite the fact that some hedge funds offer a negative

despite the fact that some hedge funds offer a negative assessment of European loan default swaps

assessment of European loan default swaps - hedge funds also dislike the fact that the contracts are callable

- they appear to be trading quite

actively. Notes one hedge fund trader:

"When European loan CDS first started trading, spreads traded ap- proximately on top of the spreads of the underlying loans. CDS now trades at least 50bp tighter. That suggests that the key people already visible in the market in the pric- ing of the loan CDS are the hedge funds and people taking risk." He adds: "We just want to trade. Callability isn't great but we'll cope with it, the same way that we cope with it in the high-yield bond

market. The people who worry about

it almost certainly already have call-

able assets in their portfolio."

EUANHAGGER

ACA plans IPO

ACA Capital, the single-A rated monoline and CDO asset manager, has filed a prospectus for its IPO, an offering that would mark a new chapter in the eventful life of the structured credit specialist. The New York-headquartered company invests in and manages CDOs and had total credit exposure of $21.5 billion at the end oflast year. It has

a total of $9.9 billion of third-party funds under management. The filing sheds light on many details of the company's business. It shows that ACA's profits are split evenly between its three main business lines: CDO management; structured credit - that is, the busi- ness of investing in synthetic CDO tranches and other credit deriva- tives; and municipal finance, which involves providing wraps for munic- ipal bonds. In 2005, the three units contributed $15.9 million, $16.7 million and $13.6 million of income before tax respectively. In total, the company made profits of $43.9 million last year from revenues of $330.6 million. The company currently has nine cashflow and five synthetic CDOs under management, mostly backed

by asset-backed securities and cor- porate risk. Last year it launched its first deal backed by high-yield loans. ACA is mainly a buy-and-hold investor in credit derivatives, and

typically sells protection on tranches rated triple A. Of a total of 85 deals

it has entered into since the business

started in 2002, 76 remain out- standing, and the portfolio totalled

$14.6 billion at the end of2005 in terms of swap notional. According to the prospectus, ACA has begun to move down the credit curve since 2005, taking on

its first credit default swaps rated below triple A. The company says

it expects to expand the structured

credit business by moving into structured finance risk, such as the

ABX indices and credit default swaps on individual mortgage-

backed securities. The company began life in 1997 as American Capital Access, at- tempting to carve out a niche as a single-A rated financial guarantor. (Most monolines, by contrast, are rated triple A.) In 2000, the com- pany was forced to restructure and recapitalise, bringing in Michael Satz as chief executive from mono-

line reinsurer Capital Re. Satz hired

a new team mainly from Prudential

Securities, including chief operat- ing officer Maryam Muessel, and

the company switched its focus to managing CDOs and investing in credit derivatives. In 2004 ACA underwent a second period of convulsion after rating agencies put pressure on the company to increase its capital base. It hired current chief executive Alan Roseman to replace Satz, and changed its name from American Capital Access to ACA Capital. At around the same time, it raised $170 million of new venture capital, chiefly from Bear Stearns which became the company's biggest shareholder with a 34% stake. Last October the company lost

a court case brought by Muessel, who left at the same time as Satz to become chief investment officer at Fortis Investments. She claimed $3.2 million in severance pay from

6

I June 2006

NEWS

the company on the grounds of constructive dismissal. ACA Capital

says it is appealing against the judg- ment by the New York state supreme

court.

MP

Dealers push through CDS of CDO docs

The market is set to unveil standard pay-as-you-go documentation for credit default swaps referencing cashflow CDOs. Isda confirms it is moving ahead with the project, in conjunction with a committee consisting of a broad mix of coun- terparties. Says Kimberly Summe, Isda's general counsel: "We should have a draft out in the last week of May and my hope is that it will gener- ally reflect the consensus views of the membership. We have had good member comments. If people seem supportive of the way we have put

comments. If people seem supportive of the way we have put WS their comments into writing,

WS

their comments into writing, then

I think we can move ahead, after a further five business day comment period, to publication." Traders say that the documen-

tation discussions stalled briefly when some firms called for language clarifications and, more funda- mentally, disputed the inclusion of

a clause allowing 'implied write-

down' - a floating payment event triggered when a calculation agent determines that the reference obli- gation is under-collateralised. How- ever, Isda says that the revised draft takes these views into account. "Whether or not to include

implied write-down was really the issue that had most focus in our conversations," says Summe. "We

didn't have a consensus for taking

it out or hardwiring it in, so we did

the most prudent thing by leaving

it up to the counterparties to make

that decision.

Credit

"It is in the nature of compro-

mise - there will be dealers who will want to include implied write- down and those who do not want to include it, and they will be able to negotiate that on a counterparty by counterparty basis." According to one trader, the majority of committee members

were in favour of including the 'im- plied write-down' clause. He says that discussions have been lively. "Investors are very vocally saying what they want," he says. Says Todd Kushman, manag- ing director and product specialist for structured finance derivatives at Bear Stearns in New York: "People want to trade something that com- pensates for losses as they occur. From an accounting perspective you

have an impaired security. Implied write-down recognises that impair-

ment and, if you are taking that impairment write-down on your

security. Implied write-down recognises that impair- ment and, if you are taking that impairment write-down on

Credit

NEWS

Credit NEWS accounting books, it is reasonable that you actually pay someone for that protection of

accounting books, it is reasonable that you actually pay someone for that protection of a loss." Traders say that standardisation should boost interest in cashflow CDO credit default swaps. Says Fred Horton, head of the structured finance group at New York-based credit specialist GSC Partners: "It is very much ofinter- est to us. We have a substantial on- going need to put that kind of risk on synthetically. Standardised Isda docs take away the bilateral nature of a trade and make it multilateral. If you trade on a unique set of docs you can only really transact with the one guy that has agreed to those unique docs." esc manages alternative invest- ment strategies in control distressed debt, corporate credit, European mez- zanine and structured finance. Adds Kushman at Bear Stearns:

"You will have more transparency in pricing, because people are going to be able to execute on a regular basis, and more tiering of managers. A manager's deal will be able to price more than just in the primary and the rare occasions it trades in the sec- ondary market. You'll also have the growth of CDOs squared and we'll see people doing basis trades between CDOs and single names." DA

Manager wins CDO takeover mandate

Cambridge Place Investment Management, a specialist manager of asset-backed securities based in London, is believed to have secured investor approval to take over two existing CDOs of ABS from Aus- trian firm Uniqa. The deals, Stanton MBS I and Stanton ABS I, were launched in 2004 and 2005 respectively. Inves- tors in these two deals and a third deal, Stanton CDO I, triggered key-man clauses to dismiss Uniqa as manager when portfolio manager Marcus Klug left the firm last year. Seven investment managers including Uniqa put their names forward to take over management of the two deals. Officials at Cambridge

Place decline to comment on their success in winning the mandates. It is understood that while the transfer of the management man- date has been agreed, final paper- work has not yet been completed. An official for the trustee on the two deals, ABN Amro Trustees, declines to comment ahead of any official announcement. Meanwhile, management of the third ofUniqa's CDOs, Stanton CDO I, is set to be transferred to Omicron Investment Manage- ment, the new firm set up by Klug and his team (see page 32). Cambridge Place was set up in 2002 and manages a number of vehicles focusing mainly on asset- backed securities. These include five CDOs of high grade ABS, Camber 1 through to Camber 5, and a hedge fund, CPIM Structured Credit

Fund.

Short form

Software vendor links to DTCC

Omgeo has announced it is link- ing its latest offering, Omgeo Connect, to DTCC's Deriv/SERV platform, which matches and confirms OTC trades. The link, intended to go live before the end of the second quarter of 2006, will allow investment managers across asset classes to integrate domestic and cross-border trade processing at a single point of access. Omgeo Connect allows invest- ment managers and outsourcers to interact withOmgeo services and other third-party post-trade solutions. According to the firm, it enables streamlined trade and settlement management of various asset classes via an ASP applica- tion, reducing the need to main- tain. multiple systems and services. In Iinkingto DTCC~Omgeo says Connect will extend its XML message specification to capture data relevanttoOTC derivatives, transform this data into industry-standard FpMLmes- sages and route these mess.agesto Deriv/SERV via an MQinterface. Post"matching, Omgeoc:onnect will·receive.statusmessagesfrom Deriv/SERV, transform thesemes- sages and pass them backfothe investment.·manager.·

MP

There are a number of errors in the portfolio credit swap league tables printed· inthe
There are a number of errors in
the portfolio credit swap league
tables printed· inthe .1 May issue
of Credi~ux.Theseerrorsaf-
fect the industry totals. for 'name"
referenced' trades, but .dono1:
affect·thetotatforanyindividual
banks. As a result Qfadata input-
tingerror,wealsounderstated
leh m an
l5r
Octhers'.totalofin-.
dex.tranches.Bothicorrect.tables
arenOwsh()wrJ o~thE!website
. The correct figuresare shown
on .our website atwww.creditflUlc
col11/publicltables.

Asia logs high-yield first-to-default first

Traders in Asia say that the market has traded its first example of an inter-dealer first-to-default (FTD) basket of high-yield names. Details of the counterparties and basket names were not forthcoming as

Credi~ux went to press. How- ever, it is thought that the basket may include such credits as Noble Group and Vedanta, both ofwhich saw significant volumes in mid-May. Says one Hong Kong-based trader: "There were a few quotes in high-yield FTDs and one went through, the first time we've seen that in the street. It traded at around 74% spread." "There were a lot of two-way quotes on a few high-yield names," adds another trader. "That's the first time we've seen that for a while." First-to-default baskets are popular in Asia, where a secondary structured credit market is rela- tively undeveloped. Traditionally, however, FTDs tend to reference emerging market sovereign names, which are the most liquidly traded

DA

Asian credits.

8

I June 2006

NEWS

Isda firms up successor plans

An overhaul of successor language

- the mechanism governing credit

default swap migration to new refer-

ence entities following debt-related corporate actions - has stepped up

a gear. Isda confirms that it is work-

ing on new documentation, for use globally. "We do intend to publish some documentation that updates the 2003 credit derivatives definitions with new successor language," says a spokesperson for the association. Recent leveraged M&A deals and capital reorganisations have thrown up examples where successor language has failed to provide for the migration of credit protection. Indeed, successor shortcomings, from a protection buyer's perspec- tive, contributed to the massive move tighter in credit spreads, start- ing in mid-March. The short squeeze, in the Eu- ropean market at least, coincided with panic in relation to a capital reorganisation at UK pest control company Rentokil. Investors woke

up to the fact that credit protection on the old Rentokil reference entity would shortly be worthless, once bond issues at that point in the com- pany structure matured. Together with Rentokil, a long line of M&A deals and corporate actions have produced successor 'hot spots' in Europe. However, the North American market has also been struggling with successor lan- guage, for example in relation to car rental firm Hertz, and travel com- pany Cendant. Problems arise because the suc- cessor mechanism only covers the transfer of existing debt to new ref- erence entities. That does not cater for situations like bond buybacks, or where debt matures and new debt is issued in a new entity isolated from the previous borrower. Although Isda is attempting to grasp the nettle, there is com- mon agreement that replacement language covering a broader range of corporate actions will be difficult to achieve.

range of corporate actions will be difficult to achieve. Notes a London-based in-house lawyer who is

Notes a London-based in-house lawyer who is working on the prob- lem: "At least currently we have a transparent mechanism. It may not

always provide the right result for the protection buyer but it does pro- vide certainty. "The task is to be explicit about

further scenarios, even though it will be impossible to deal with all situations, and to make the approach sufficiently generic." EH

Codefarm launches online version of structuring tool

Codefarm, which provides CDO structuring software, has become the latest vendor in the credit derivatives space to make its product available as an online service. Last month, the UK-based company launched Galapagos Structurer Online, a product consisting of a desktop application which connects to an off-site computer grid operated by Codefarm. The firm says five banks are already using the standalone version of Galapagos Structurer, including several leading issuers of synthetic CDO. But the online service, which has been trialled with four banks, will make it possible for less fre- quent issuers of synthetic CDOs to make use of the product. Codefarm managing director Jeremy Mabbitt says the cost of subscribing to the online service will be significantly less than the low to mid six-figure sum charged each year for the standalone version of the software. "The upfront cost is significantly less," he says. "And for clients with low deal volumes, the cost is less overall. However, the standalone product remains the best solution for high-volume issuers." The company claims the soft- ware can save resources and improve breakeven spreads for CDO issuers. It automates the process of struc- turing a synthetic CDO, including choosing the optimal names for the portfolio based on the investor's re- quirements. However, like other kinds of

Credit.

derivative software, the product consumes a large amount of com- puting resources. For this reason, several vendors are switching to an 'application service provider' model, running the product online rather than installing it onto the client's own systems. Pricing ven- dor Cn02, for example, recently began to offer its CDO Sheet tool through Sun Grid, the computing- on-demand facility provided by Sun Microsystems.

A key benefit of the ASP model

is that customers' IT departments

no longer need to be much involved

in installing the software. Mabbitt

says the online version of Codefarm's

software can be up and running in a matter of hours, rather than weeks for the locally installed version.

Codefarm Software, which em- ploys a total of 15 people and is based

in Brighton, launched the Galapagos

product around two years ago. It recently incorporated Reoch Credit Partners' structured credit pricing model into the application. MP

Broker eyes credit derivatives fund for Israeli corporates

A Tel Aviv firm plans to set up what

promises to be the first credit deriva-

tive fund targeted at Israeli institu- tional investors. Contact Israel, a broker and consultant, aims to have the Cayman-domiciled fund up and running around August. This, along with a private equity fund, will be the firm's first asset management venture, although it is no stranger to the credit derivatives market. The firm advises mainly corpo- rates and public sector organisations on investments, and has been focus- ing on credit derivatives for some time. Its clients, including large Israeli corporates such as BMW Israeli and Egged, a large coopera- tive society, typically trade credit derivatives in unfunded format us- ing standard Isda documentation. Trades the company has steered its clients towards include nth-to- default baskets on international cor-

Credit

NEWSNE

Credit NEWSNE porate names. However, a current focus is second-to-default baskets comprising a mixture of asset-

porate names. However, a current focus is second-to-default baskets comprising a mixture of asset-

Isda warns court decision could 'chill' CDS market

Short form

backed securities and Israeli banks. "We are recommending trades refer-

encing asset-backed securities to our clients because of the high recovery rates for ABS and also because there is a lot of market data available on these securities," says Ofer Abar- banel, Contact Israel's founder. "That makes it possible to get good pricing and analysis." A typical trade might be a sec- ond-to-default basket on up to 12 names, mostly US credit card or car lease-backed securities, along with

Isda has taken the unprecedented step of throwing its weight behind

Markit bUys post- trade vendor

a

counterparty involved in litigation

Data company Markit has bought New Jersey-based software ven-

dor Communicator. The pur-

over a credit default swap contract. Last month the trade body submit- ted an 'amicus curiae' brief in sup-

port of SG's appeal over a court case

chase takes Markit, best known for its consensus pricing service

it

lost in February.

for credit default swaps and its Red database of credit deriva- tives reference entities, into the increasingly competitive market for credit derivative post-trade processing. Privately-owned Communica- tor.which was set up in 1999 by a group of former Salomon

Isda says it is concerned that unless the judgment by the New York Southern District Court is overturned it could "have a chilling effect on the financial markets and

couple ofIsraeli credit card assets and financial names such as Bank Hapoalim or Bank Leumi. Such

a

would eliminate a significant means by which banks, financial institu- tions and corporations diversify

a

trade might pay around 70 basis

their credit risks". In the original case US insur- ance company Aon successfully sued SG over a credit default swap ref- erencing the Philippines which was traded in 1999. Aon was the buyer of protection and SG the protection seller. It seems highly unlikely that

SG would have accepted that it had any reason to payout under the credit default swap. (Aon ar- gued that a surety bond issued by the Government Service Insurance System of the Philippines enjoyed a

Brothers

IT professionals, pro-

videsWeb-based software for reviewing and comparing GTC

•derivative·docUmentation.

LeoSC:hlinkert,.Communica-

tor'spresident,willjoin Markit's executive.team,Communic:ator, which. becornesa wholly owned subsidiary of Markit, is expected to be integrated into its new par-.

entin due.course.

1"radeweb launches·

EurC)peanc.ash

tradingsysJ;em

points. "This enables our clients to ac- cess a transaction with double-A to triple-A risk with high expected recovery rates, and with returns enhanced by the inclusion of the Israeli banks," says Abarbanel. "The

Israeli banks are triple-B names but

it

is risk that our clients are usually

very comfortable with." The firm has also facilitated trades involving equity default

swaps, typically arbitraging between EDS and equity warrants. Last year

traded $120 million on behalf of

it

clients and expects to top $200 mil- lion this year. The new fund, the Contact Cli- ents Central Providence Fund, will include similar trade ideas along with other fixed income investments and should be over $200 million in notional size by the time it is fully ramped up. The fund will be benchmarked against the Lehman Aggregate, which it aims to beat by between 70bp and 120bp. Clients will increase their initial capital commitments depending on the performance of the fund. Abarbanel established Contact Israel in 2000 after returning to his native Israel after a career in finance in Toronto. He worked for a large Canadian bank, which he declines

to name, in its investment manage-

sovereign guarantee.) However, the case hinged not on Aon's right to call the credit event but on the need for Aon to deliver an obligation to SG to get paid under the credit de- fault swap. The original judge accepted that SG owned Aon under the credit de- fault swap even though Aon did not complete the physical settlement. "The rulings are directly contrary to the settlement mechanics set forth in the Isda's standard documenta- tion that is used in this $17.1 trillion market," argues Isda in its brief The trade was a 'long-form' contract predating the introduc- tion of the standard 1999 short- form confirmation and definitions. Nevertheless, Isda argues that the concept of delivery-versus-payment is spelled out in the documentation with sufficient clarity that there was

Thomson Tradewebhasan- nouncedthelaunchof a European cash credit trading platform. The company says it has signed up eighidealersto the dealeNo-di- entsystem.Tradeweb·isalready present in the European credit marketwith a tradingsystem for . credit default swaps. In addition. its North American offering in- c1udesboth cash and derivative creclitTnstrumellts;

CDS volumes grow

The Ballkforlnternational

Settlements says cree! it default swap notionals increased to $13.7 trillion in the second half of 2005. Growth wasparticulady strong in the.single-n.ame·market. Notional amounts increased to $1 0.2tril- lion. Credit: portfolio swap notion~ als roSeto$3.5trillion.

ment business.

MP

NEWS

no need for the district court judge to look outside the contract to reach his decision. The judge found that the SG/Aon contract was ambigu- ous and drew reference in his deci- sion to a separate credit default swap which Aon had traded with a differ- ent counterparty. MP

Isda unveils standard recovery docs

Isda has published a template for trading recovery lock credit deriva- tives, or recovery swaps. Introducing a standardised way of trading recov- ery swaps follows a recent increase in trading volumes, due mainly to the distress in the North American auto sector. The template formalises the zero premium approach to trading recovery swaps which the market had already largely converged on. Such trades lock in recovery rates by setting the reference price at a strike

in recovery rates by setting the reference price at a strike level, and setting the fixed

level, and setting the fixed rate pre- mium at zero. Following a credit event, the recovery seller receives the strike and delivers reference ob- ligations to the recovery buyer. The recovery seller makes mon- ey if the reference obligations are worth less than the actual recovery

rate. The protection buyer is there- fore the recovery seller, and is short the recovery swap. Dealers say that it has been relatively easy to encapsulate recov- ery swaps in standard documenta- tion. However, the possibility that

a protection buyer (recovery seller)

could lose money if a credit event is

triggered - an odd notion compared with the usual way that credit de- rivatives function - required some thought. Notes a credit derivatives dealer: "Recovery swaps sound like

a pretty easy product to put into

documentation. However, it is a lit-

tle bit more complicated when you

Credit.

look into it. The protection buyer might realise a loss, depending on where recovery is, and might not want to trigger." As a result, the documenta- tion gives the protection seller, or recovery buyer, the right to deliver a notice of physical settlement from the 35th calendar day up to the 45th calendar day after the event deter- mination date. Except for clerical errors, pro- tection buyers must stick to the ref- erence obligations and principal bal- ances set out in the notice. Over the

first 35 calendar days, a protection buyer can deliver a notice of physi- cal settlement in the normal way. A protection buyer's notice takes precedence over a protection seller's ifboth notices are delivered on the 35th calendar day. Credit events under the recov-

ery lock confirm mirror the triggers that apply geographically to stand- ard credit default swaps. EH

You don't need a quant to spell it out for you

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Credit

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Market awaits surge

of loan-referenced

synthetic CDOs

Arrangers and rating agencies expect a sharp increase in synthetic CDOs backed by leveraged loans in coming months. Unlike the many cash- flow, market value and total return swap-style deals that have used loan collateral in the past, these deals are structured as classic synthetic CDOs, with investors buying a credit-linked note or swap referenced to a tranche of a credit portfolio. The structural difference be- tween these deals and most synthetic CDOs is that the deals use a loan- only credit default swap, where the only assets that can be used to trig- ger or value a default are loans. Such transactions have appeared sporadically for several years, with Bank ofAmerica probably the most active protection buyer through deals issued by its Strata vehicle. In the first quarter of2006, Creditflux's list of portfolio credit swaps (see www.creditflux.com/data) includes only one such synthetic CDO, Citi- group's Beach Street. However, several dealers con- firm that they are working on a number of synthetic loan transac- tions that are expected to come to fruition shortly. Buy-side sources report that there is already a dis- cernible increase in demand for loan assets from dealers looking to hedge these synthetic CDOs. The US has by far the largest universe of outstanding high-yield loans. However, the synthetic deals in the pipeline typically include both European and North American reference assets, with the somewhat higher yielding European assets providing much of the juice for the transactions. Coming deals are likely to in- clude both managed and static port- folios. "We are seeing a clear trend towards leveraged loan synthetic transactions," says Paul Mazataud, managing director at Moody's in Paris. "We are being asked to look at both static and managed deals, including both European and North

American loans. This may be a part of the market with a lot of potential given the development of the single- name loan-only credit default swaps market and investors' demand for new and possibly higher yielding exposures." Although investors have gen- erally shunned synthetic CDOs referenced to high-yield names in the past, it is thought that the high historical recovery rates of high-yield loans compared with bonds is a key factor in persuading them to con- sider lower-rated reference assets. But the key factor behind the growth of this type of deal is un- doubtedly the growing market in loan-only single-name credit default swaps. The imminent launch of a standard Isda confirm for this type of trade (see page 5), along with the prospect of a credit derivative loan index further down the road, should make it more efficient for dealers to hedge these transactions, and that could fuel the growth of this part of the market even more.

MICHAEL PETERSON

Arrangers look to fully rated CPPI deals

Rating agencies are racing to issue the first ratings on credit CPPI transactions that will address the risk of both the principal and the coupons of the notes. Most of the credit CPPI notes issued since the market began a

couple of years ago have been rated.

But in all cases the ratings address only the principal- which is protected through the rebalancing mechanism - and not the coupons, which bear most of the risk. Structurers believe that fully rated deals could expand the market for credit CPPI. "One thing that worries potential investors is the un- certainty of their return," says Alberto Thomas, head of credit de- rivative structuring at Royal Bank of Scotland in London. "If you have

an independent agency quantifying

that risk it will improve the mar- ketability of this product." Thomas confirms that RBS is talking to rat- ing agencies about getting coupon ratings on future CPPI products. S&P has already put out a pre- sale report on one ABN Amro deal in which it assigns preliminary prin- cipal and coupon ratings. Andrew Feachem, a structured credit marketer at ABN Amro in London, says that deal is now likely to emerge in a slightly different form over the next couple of months, but that the work ABN Amro has done confirms the value of a coupon rating. "It is the missing piece in the puzzle," he says. "Having full ratings helps investors through the internal approval process because there is an

extra set of eyeballs on the transac- tion. It should also makes things easier from a regulatory capital point

of view in the case of a bank inves-

tor. We think it will significantly increase demand for this type of structure." Adds Juan Carlos Martorell, a structured credit marketer at ABN Amro: "Getting a rating can be a lengthy process. However, the basic methodologies the rating agencies use are the same as for existing prod- ucts: CDOs for assessing defaults and recovery rates, and leveraged super seniors for modelling spread moves." The main issue a rating needs to address is the probability of a cash-out event. CPPIs 'cash out' when their cash reserve falls below a predefined floor, and the remaining cash is used to buy a zero coupon bond which will repay principal upon maturity. In a credit derivative CPPI, the reserve is used as col- lateral to sell protection on a credit portfolio. Just like the subordination in a synthetic CDO, the CPPIs reserve can be reduced by losses in the port- folio. However, unlike a synthetic CDO, a CPPI is constantly marked to market, and mark-to-market losses in the portfolio also reduce the size of the reserve. As a result, the extra dimen-

Credit

Credit

sion the rating agencies need to model is the likelihood that spread moves will force the CPPI to cash out. "Our methodology for rating the coupons on a credit CPPI deal has a lot in common with other methodologies, such as market value CDOs and leveraged super senior synthetic CDOs," says Paul Maza- taud, Moody's head of derivatives for Europe and Asia. "The key thing is to model spread movements. But we also need to have in place guide- lines about the way the portfolio will be managed, since that affects future spread movements and therefore coupons." Since the rating agencies need to model spread movement, coupon ratings are likely to be limited to those deals with liquid underlyings, particularly untranched credit indi- ces. "We are limited in terms of the type of CPPI underlyings we can rate," says Cian Chandler, analyst at S&P in London. "Currently, we are looking at long-only positions in full indices. There is no reason we couldn't rate deals based on bespoke portfolios of single names, but a benefit of using a rolling invest- ment-grade index is that it keeps the portfolio investment grade. You only need to worry about the credit drift in the six months between each roll and not longer-term credit ex- posure." Although rating agencies say they can, in theory, rate coupons anywhere up to triple A - depend- ing on the structure ofthe deal- in practice, coupons are likely to be rated somewhat lower than that level. Chandler says most of the deals that S&P is currently looking at are for ratings of between A and AA.

The big hurdle for getting CPPI coupons rated is that the initial rat- ing methodologies could be too con- servative to make deals economically worthwhile. "The rating agencies

need to make assumptions on the volatility of spreads," says Thomas at Royal Bank of Scotland. "Because those assumptions are stressed, they are typically higher than historical

volatility."

MP

Washington Square launches long/short managed synthetic

Washington Square Investment Management has brought to market what it says is the first long/short managed synthetic CDO to employ a leveraged finance trading strategy in the short bucket. In May the London-based firm, which has a strong focus on emerg- ing market credit, closed the first tap of a proposed €75million to €100 million issue. The deal, named Silver Square 2006-1, has been marketed in Europe and Asia. WestLB is the buyer of protection, with the notes issued by the Khamsin Credit Prod- ucts special purpose vehicle. The deal is structured to be long 100 and short around 30 cor- porate and sovereign names. Short positions are in names the manager identifies as likely LBO candidates. The strategy aims to take advantage of current historically tight spread levels by predicting idiosyncratic weakness in credits. Says Karan Chadha, manag- ing director at Washington Square:

"The question is, how do we take the right risk-reward in an extremely tight environment? I think this is one clever option for capitalising on that. Even after paying for the short aspect you still get good carryon the overall trade because the shorts are so cheap right now. When widening takes place you will find excess or disproportional widening on names in the double-B space over those in the triple-A space. The divergence is much more radical." Trades already done are on tranches that are 1% thick, with attachment points at 5.7% for the triple-A tranche and 5% for the double-A piece. The manager plans to use the excess spread it generates from the short bucket to improve the quality of the long portfolio through further trading. Says James Segal, a senior structurer at WestLB: "In the event of a downturn in the credit cycle, spread widening in the short portfo- lio may offset widening in the long

portfolio. In addition, the extent of credit widening in the short bucket is likely to be greater because of its inferior credit quality and the LBO candidates. This should increase sub- ordination for rated note holders and potentially lead to rating upgrades." Previous CDOs managed by Washington Square include White Tower Diversified Credit Portfolio, a €500 million synthetic CDO refer- encing investment-grade, high-yield and emerging market securities, in October 2003. In March 2005 the firm launched Wakefield Tower, a €580million diversified synthetic CDO. More recently it has launched Carador, a managed CDO equity fund listed on the London Stock Exchange, and Auriverde, an emerging market principal protected transaction.

DAN ALDERSON

Ixis CIB launches managed CPPI trade

Ixis CIB has launched a credit CPPI deal based on a managed long and short portfolio of single names and index trades. The deal, Caravelle DPI, will be managed by Ofi Asset Management, part of the Paris-based Ofivalmo Group which is owned by a consortium of French mutual insurance companies. The bank is marketing the deal, which was expected to be completed by the end oflast month, to inves- tors in Europe and Asia. "We are offering a lot of flexibility in terms of issuance formats, coupons, curren- cies and maturities, with the aim of reaching a wide range of investors," says Victoire Blazsin, a structured credit marketer at Ixis CIB in Paris. Notes will be available with or without coupons in five, seven, eight and 10 year maturities, and are expected to be rated triple A for return of principal by Moody's and Standard & Poor's. There will also be full disclosure of positions in the portfolio to investors updated on a weekly basis. As with other managed CPPI- type trades, the manager has a lot more trading flexibility than in a

Credit,

TERM

Credit, TERM , ' HEET typical synthetic CDO. Ofi Asset Management can trade single-name credit default

,

'

Credit, TERM , ' HEET typical synthetic CDO. Ofi Asset Management can trade single-name credit default

HEET

typical synthetic CDO. Ofi Asset Management can trade single-name credit default swaps, credit indices, and buy and sell bonds. The deal includes no index tranches, making it different from many of the credit CPPI trades launched to date. "It seemed to us that many in- vestors were keen to access long and short credit strategies given today's tight credit environment but without exposure to tranche correlation," says Blazsin. "In Caravelle, Ofi Asset Management has the flex- ibility to pursue a full range of credit strategies outside structured credit, including curve trades, outright shorts and relative value trades. In a CSO [synthetic CDO], by contrast, tranche rating constraints can really limit the manager's ability to use its expertise and express its views." Short positions in the portfolio can be as much as 42% oflong posi- tions, and the strategy is expected to be biased towards the short side at inception. Target returns are 350 to 400 basis points over Euribor in the case of the lO-year notes. Ofi Asset Management's strat- egy for the Caravelle portfolio is driven by sector and country views on credit. "What we have found with managing CSO portfolios is

that getting the right sector alloca- tion is key to the success of the deal," says Guillaume Launay, the firm's head of credit. "Given today's tight level of investment-grade spreads, our main focus is to identify the countries and sectors that are likely to widen in the next two years. For example, we are underweight sectors such as US autos that are at most threat from Asian and eastern Euro- pean competition." As in other recent credit CPPI trades, leverage is managed using a dynamic, asset-specific cushion- management technique which !xis CIB calls dynamic portfolio insur- ance (DPI). Ofi Asset Management monitors the leverage in the portfo- lio based on the bank's guidelines, which apply different multipliers to different assets. These multipli- ers range between 15 and 25 times based on the spreads and ratings of the individual credits. Ofi Asset Management has €14 billion under management and has pushed into credit in the past 18 months. It currently has €700 mil- lion in CDOs under management, including its debut CDO Kheops CDO I, arranged byJP Morgan in 2005, and the recent Eiffel CDO 2006 on which Calyon is the dealer.

Caravelle will be managed by the same 12-strong team. ''A CSO is the perfect vehicle to print when spreads are wide and correlation is high," says Launay. "Although CSOs have been a great tool for inves- tors last year and so far this year, a DPI such as Caravelle gives us much greater flexibility to adapt to a changing market environment." MP

CRE specialist plans

CDO

Specialist commercial real estate lender Potomac Realty Capital is reported to be planning its inaugural cashflow CDO. The company, based in Needham, Massachusetts, would become one of a growing number of companies in the commercial real estate sector to make use of CDOs as a financing tool. Other managers of commercial real estate CDOs include North Star Capital, Brascan Real Estate Financial Partners and Arbor Realty Trust. Unlike most CDO managers, these firms typically invest in a large proportion of the equity of their deals

and consolidate the liabilities on their own balance sheet. There is no word on the arranger of Potomac's forth-

MP

comingCDO.

Recent cashflow CDOs

Pricing Issue 05/05/06 Mount Wilson 2006-1

05/05/06

04/05/06 WG Horizon CLO I 04/05/06RMF Euro IV 04/05/06 Harbourmaster Pro Rata 2006-1

04/05/06 Cornstock Funding 2006-1 04/05/06 Babson CLO 2006-1 04/05/06 Airlie CLO I 03/05/06 Mercury Limited III

02/05/06

28/04/06 Gemstone V

27104/06 GSC European CDO III

27/04/06

27/04/06 NavigareFundingl 27/04/06 Octagon InvPartners IX

26104/06 MarathonRE CDO 2006-1

26/Q4/06

26/041fJ6Mount SkylightCDO

Diversey Harbor ASS CDO I

Anthracite eRE CDO 2006 Hy.1/3

HalcyonStructured AM ,CLO I

Millstqne Funding II

Size (in)

Manager Arranger

$306.7

Western AM Merrill Lynch

$2,500

Vanderbilt Cap Ad Citigroup

$400

Westgate Horizons Ad Credit Suisse

€444

RMF .InvProds BNP

Paribas

€871

HarbourMaster ABN Amro

$471

Silvermine Cap Mgmnt Citigroup

$575

Babson 'Capital Morgan Stanley

$400

Airlie

JPl'1organ

$1,002.5

ChotinGroup

Merrill Lynch

$645.4

BlackRockFin MgmntBank of America

$676

BlackRock Fin, Mgmnt Deutsche Bank

€420

GSC Partners Lehman Brothers

$460

Halcyon Structured AM

Deutsche Bank

$300

NavigarePartners Goldman Sachs

$399.8

$1,000

$1,511.5

$1,000

Octagon Credit Jnvestors

Marathon AM RBS G reenwichCap

JP Morgan

DrKW

Deutsche Bank

AM RBS G reenwichCap JP Morgan DrKW Deutsche Bank Collateral high-yield ,loans 'asset-backed securities

Collateral high-yield ,loans 'asset-backed securities highcyield loans highcyieldloans highcyield loans investment-grade loans highcyield loans high-yield loans, asset-backed securities asset-backed securities asset-backed seclJrities high-yield,loans high-yield loans High"yieldloans high-yield loans asset-backed securities'- nmet-backed se:clJrities

ass~t~backedsecurities
ass~t~backedsecurities

Credit

TRADING DESK

Winds of change chill credit

Some said it would take a credit shock or a sudden derioriation in the economy to put an end to the recent dramatic squeeze in credit spreads. But if mid-May's uptick in spreads is really the beginning of the end of the bull market, the only triggers have been falling equity and commodity prices, and volatility in the FX and interest rate markets

Week beginning 24 April

Direction: tighter Volume: light Credits in the spotlight: Intelsat, Rite Aid, Grohe, Lear, Air France, Thomson, Aiful, Domtar, Bowater, Mediacom

Liquidity is continuing to drain from the credit derivatives market, dealers report, after a four-week- long ratcheting in of North Ameri- can spreads, and in Europe a return to the tight levels of three weeks ago.

The structured credit bid has been a major driver of the tighten- ing. In the crossover market, spreads have reached their tightest ever levels, partly reflecting the reach for yield among investment-grade CDOs. Such transactions include high-yield and crossover buckets. "Inevitably as spreads tighten, the size of the buckets increases," says a sell-side credit structurer. "Portfolios for triple-A tranches have twice to three times the aver- age spread of the main investment- grade index, so there are a lot of names in those portfolios that are not in the main index."

Meanwhile, triple-C rated credits have produced some of the most dramatic tightening, as spreads have been crushed. For example, satellite com- munications firm Intelsat has moved 96 basis points tighter on the month, says price service Markit, to 530bp on 25 April. North American drugstore chain Rite Aid is 53bp tighter on the month, at 478bp. Meanwhile, low single-B credit Grohe has tightened by 108bp, says Markit. The bathroom fittings firm's five-year default swap closed at 555bp on 25 April. Auto parts supplier Lear Corp has rallied even more dramatically, despite being downgraded to single

B by all three rating agencies since

mid March. According to Markit, Lear's five-year credit default swap

was trading at 589bp on 25 April. That is 267bp tighter compared with

a month earlier. In the tranche market, CDX five-year and seven-year equity and lO-year junior mezzanine tranches have been rallying strongly. Week on week to 21 April, the 0-3% tranche of the five-year CDX IG series 6 tightened $1.75, says Ash- ish Shah, co-head of credit strategy

AMR vs Lear, S.year CDS (bp) 2000 AMR 500 Lear o
AMR vs Lear, S.year CDS (bp)
2000
AMR
500
Lear
o 1w.twJW1WLWW<lJJJ.lJllwuwwuwJWWJJW1WLWW<wuwJWWJJWWJJW1WJW1WLWW<wuwWJJ
17 Nov I Dec
2 Jan
I Feb
IM
-
JApe
I May

at Lehman Brothers in New York. But the investment-grade five-year 7-10% tranche widened 4bp on a delta adjusted basis, he says. The rally has accelerated the roll-down on the off-the-run tranches, adds Shah, resulting in very tight levels on the senior and mezzanine tranches. In Europe, the rally in the underlying market has been driv- ing equity tranches tighter, and mezzanine tranches wider across all maturities, he says.

Week beginning I May

Direction: tighter Volume: moderate Credits in the spotlight: Visteon, American Axle, Toys R Us, Lyon- dell Chemicals, Equistar Chemicals

Anybody who felt it was safe to put on new curve steepeners over the past week should have remembered that the soccer world cup is coming up. Dealers say that with quiet sum- mer months approaching there is little likelihood of any news to help

reverse the current squeeze tighter. "People are getting hosed," says one trader. "Five to 10 steepeners have been smashed. Curve flat- tening is squashing any benefits of

positive carry and roll-down. We are devoid of credit news. There's nothing out there to frighten people. Everyone is packing up for the sum- mer and the world cup." Adds an iTraxx Xaver trader:

"You can't see a bid in five-year, let alone lO-year. People are trying to cover shorts and desperately hitting the Xover." Indices in both Europe and North America reached new tight levels on 2 May, with iTraxx Xaver at 222/224bp, HiVol at 44.75/45.75bp and Europe main at 26.5/27bp. Dow Jones CDX IG closed at 34bp mid price on 2 May, versus 37.5bp a week earlier. In Europe, dealers say that new short positions were being built up in the 245bp to 250bp area in the Xover index. But the index has smashed through those levels. Says one trader: "We saw

Credit

.

TRADING DESK

tights of 245bp after the big rally in March and ApriL We went back up to 270bp and a lot of people decided we had found a new range. But it's the same story. People think they can call the bottom of the market, but then it goes tighter and there's a capitulation." According to one trading desk, recent index trading volumes have been around 25% higher than the 2005 weekly average. In Europe,

a lot of that flow has been going

through the Xover index. Says one trader: "The universe in Xover is enormous. It gets used as a macro hedge for all types of portfolios. When it rallies like this you get a lot of sellers. It feels like a meltdown."

Week beginning 8 May

Direction: wider Volume: moderate Names in the spotlight: Ford, Fairfax Financial, Degussa, Boots, VNU, Vivendi

Traders this week report record trading volumes for North Ameri- can single-name CDS ofABS and

a rejuvenation in flow across the

corporate credit market. According to figures from one North American dealer, volumes for single-name CDS of ABS reached $2 billion-2.5 billion in the week

ending Friday 5 May, with Friday's volumes alone upwards of $330 mil- lion on the day. Traders say much ofthis vol- ume resulted from so-called BWICs and OWICs (bids and offers wanted

in competition), which have been placed by structured books to ramp up and unwind trades. BWIC/ OWIC positions allow the placer to choose the best price for a transac- tion from a list of prices submitted by different dealers. Says one New York-based trad- er: "It has been a big week for the CDS of ABS market. There are a lot of people trying to fill CDO risk by executing long/short strategies using

BWICs to go long and OWICs to go short or unwind." Dealers say that the ABX Home Equity index has also seen high volumes due to the structured book push. Says one sell-side trader:

"There's great liquidity, but also a strong imbalance of CDS-wrapping assets which drives spreads tighter. ABX is actively traded and quoted - it's kicking off at a very good pace." In Europe, however, traders say supply and demand issues have made for a lack of new developments in the ABS space. Says one London-based trader:

"In the first quarter of 2006 we saw

decent new issuance, but the second quarter is lagging so far on 2005. Right now demand way outstrips supply." Meanwhile, corporate credit traders in Europe say volumes have picked up significantly in recent days. Says one trader: "It's too early to call but two-way flows are back. There seems to be willingness to trade again after the dramatic drop in volumes in April and in terms of

Venezuela vs Indonesia, S-year CDS (bp)

200

Venezuela vs Indonesia, S-year CDS (bp) 200 Indonesia Venezuela

Indonesia

Venezuela vs Indonesia, S-year CDS (bp) 200 Indonesia Venezuela

Venezuela

Venezuela vs Indonesia, S-year CDS (bp) 200 Indonesia Venezuela

levels we are consolidating. There's

certainly a bit more risk appetite." According to market partici-

pants the telcos sector has seen some

of the heaviest activity. Says one

official at a London bank: ''A lot of

structured credit people have ex-

posure to telcos and going forward they think spread-wise we've seen the tights and there's very little downside in hedging long positions

at these levels." There has also been protection

buying in the HiVol index. One

trader points out that the differ-

ence between iTraxx Europe and the HiVol index had narrowed to

as little as 20bp a few days ago, but

yesterday widened to 23bp. "People are getting more confident that this horrific squeeze is nearly over and

at some point the credit market will

come back to a more rational pric-

ing," says the trader. Actively traded names include Degussa and Boots, both ofwhich

have raised issues of deliverables. Trades on LBO names such as

VNU and Vivendi remain subdued,

however, with little flow of real

news. Vivendi reached a wide of

50bp on 10 May (7bp wider on the

day) on rumours of a takeover, but

traded back in tighter to 44/49bp as

these claims were rebuffed.

Week beginning I S May

Direction: wider Volume: moderate Names in the spotlight: GMAC, emerging market sovereigns

A week of falling equity indices,

commodity prices and a hike in US interest rates have all contributed to widening credit spreads this week, with emerging market sovereigns seeing some of the biggest increases

in spreads and heaviest trading. The

CDX emerging market index has

moved some 20 basis points wider in the past week. In Asia, for example, traders say the majority of credit trading

volume has focused on sovereign credits, with Philippines widening

23bp

on the week to 166bp by 16

May,

according to Markit. Indone-

TRADING DESK

Credit

sia, meanwhile, is out 9bp on the week at 152bp. "People have a bit more aver- sion to risk than last week," says one trader in Hong Kong. "Indonesia and Philippines have come a long way, as have most emerging mar- ket names. The market is looking around now and saying 'we've priced in too much good news'." Even so, there are still strong technical forces pushing down on spreads. "We've seen some mar- ginal weakness in investment-grade names," notes one trader in Asia. "But there are still a lot of shorts from CDOs out there. We've seen some widening in Indian names by a couple of basis points, and then some of the high-yield names have also widened 10-15 bp." On 16 May, Noble Group was quoted by one desk at 222bp (7bp wider). Vedanta, meanwhile, moved from 200bp to 215bp over the course of the same day. Traders say volumes outside of sovereign names were muted, however. Market participants note that similar effects have been felt throughout the credit derivative markets. Other emerging market names, including Argentina, Ec- uador, Venezuela, Brazil, Turkey and Peru, have all experienced sig- nificant volatility in recent trading sessions. Argentina, for example, widened 28bp on 12 May to 289bp, then tightened back in to 277bp on

Ford vs General Motors, S.year CDS (bp)

1500 1200 600 LLL-U-JCU-J U.-U-JCU-J U.-U-JCU-J U.-U-JCU-J U.-U-J J LJ U.-U-J J LJ U.-U-J J
1500
1200
600
LLL-U-JCU-J
U.-U-JCU-J
U.-U-JCU-J
U.-U-JCU-J
U.-U-J
J
LJ
U.-U-J
J
LJ
U.-U-J
J
J

I Mar

15 Mar

29 Mar

12Apr

26Apr

10 May

15 May before continuing to widen on the following two days. Says one London-based trader:

'decompression trade', based on the widening relationship between Hi- Vol and Europe is still some way off

DAN ALDERSON,

"A wave of uncertainty began at the end oflast week which took its cue from developments in the currency markets, with a relatively weak dollar and a strong yen. Then this week all the carry currencies such as Turkish lira, Brazilian real, some of the Asian currencies, took a pretty significant beating and that has fil- tered through to weaker emerging market spreads and to some degree weaker credit spreads." In Europe and North America investment credits are generally moving wider in the absence of any particular credit stories, and in spite of strong structured credit activity which could normally be expected to push spreads tighter. "It's purely a macro call," says one trader.

returning value. Says one trader: "It probably won't perform in the very short term because they've been tracking each other more or less on a two-to-one basis, but if individual names find their true level that relationship probably won't hold and over time you'll see more severe widening in the HiVol." Notes another trader: "The mil- lion-dollar question is whether this is just a small blip or if it signifies a shift in mentality and more aware- ness to risk. There hasn't been any panic selling in the credit markets just yet, but everyone will be watch- ing the equity and FX markets very closely now."

Traders note that a so-called

EUANHAGGER

Credit indices Basis points (mid price) North America 16 May 2006 9 May 2006 2
Credit indices
Basis points (mid price)
North America
16 May 2006
9 May 2006
2 May 2006
DjCDXNAIG
40.0
36.7
34.0
DI CDX NA HVOL
6807
64.4
DICDXNAXO
167.5
156.3
147.6
DICDXNAHY
304.2
294.7
284.1
Europe
iTraxx Europe
30.2
28:3
26,8
iTraxx Europe.HiVol
54.2
49.1
45,.6
iTraxx Crossover
248.7
234.7
226:7 .
Japan
iTraxxC) lapan
27.5
·27.3
28.4
Others
DICDXEM
159.2
iTraxx ex-Japan
53.5
iTraxxAustralia
27.2
-So~rces:--Mc"kjt
l.nternat;onal-Index
Company

37.5

70.8

161.5

298.3

29.4

50.4

247.8

·29.3

146.7

57.4

28,5

25 Apr 2006

18 Apr 2006

II Apr 2006

39.0

39.5

74.6

75.3

165.5

174.9

312.1

322.3

31.5

28.8

56.0

56.7

270,2

266.9

29.1

27.4

165.2·

56.9

28.8

31.5 28.8 56.0 56.7 270,2 266.9 29.1 2 7 . 4 165.2· 56.9 28.8 1 June

Credit

TRADING DESK

Single-name credit default

(five years)

16 May 06

25 Apr 06

(five years)

25 Apr 06

swa~rlces

16 May 06

bid

offer

bid

offer

bid

offer

bid

offer

EUROPE (iTraxx Europe 5)

EUROPE (iTraxx Europe 5)

ABN Amro Bank NV

7

7

7

8

Accor SA

41

45

3S

40

Adecco SA

SO

53

41

45

Aegon

14

16

13

19

Akzo Nobel

25

29

22

25

Allianz

12

14

12

16

Altadis SA

40

44

43

47

Arcelor Finance SCA

49

54

45

52

Auchan SA

18

21

18

23

Aviva Pie

12

14

12

16

AXA

13

16

15

19

Banca Popolare ltaliana

29

39

30

38

Banco

Comercial

Portugues

10

13

10

13

Banco Espirito

10

13

12

14

Barclays Bank

8

9

8

10

BAT

34

38

36

40

Bayer

30

33

23

27

BBVA

9

II

9

II

Bertelsmann AG

32

41

30

34

BMW

17

20

19

20

Boots Group Pic

34

36

27

30

British Aerospace

25

31

36

British AirportAuthority

52

56

52

55

British Telecom

49

53

48

52

Cadbury

25

30

26

Capitalia SpA

14

15

14

16

Carrefour SA

16

18

15

18

Centrica

 

36

40

33

37

Clba Specialty

 

52

56

Commerzbank

 

10

13

10

13

Monte dei Pasch; Munich Re National Grid Transco Pic Nokia Nestie

Pearson

Peugeot

Phillips Electronics

Pinault

Portugal Telecom

RBOS Pie Reed Elsevier Renault SA Rentokil Initial Pic Repsol Reuters Group PLC RWEAG Safeway Ltd Saint Gobain B.Y. San Paolo IMI

Sanofi-Aventis

Santander

Siemens

Sodexho

Stora EnsoOYJ

Suez Lyonnais

Svenska Cellulosa Swiss Re tate & Lyle PLC Technip Telecom .Italia

12

14

12

15

12

15

13

17

20

22

21

23

5

8

6

10

12

15

36

40

30

35

25

27

23

26

19

21

21

22

38

40

40

46

114

124

130

144

6

8

S

9

25

30

23

33

26

29

24

28

50

60

25

38

41

27

31

26

28

23

25

14

19

16

20

41

46

42

46

25

27

27

28

II

14

II

14

13

16

13

17

10

II

10

12

12

15

26

30

48

53

S3

17

20

16

20

26

31

16

18

16

21

29

34

30

37

21

23

Compass Group 50 56 25 28 47 52 43 Continental AG 31 34 45 50
Compass Group
50
56
25
28
47
52
43
Continental AG
31
34
45
50
-Telefonica
41
43
43
DtX
56
59
31
33
TeliaSonera
27
31 u
30
Degussa
76
86
54
58
Tesco PLC
15
18
16
Deutsche Bank
10
13
75
85
Thomson
69
76
78
Deutsche Telecom
37
41
10
13
12
14
13
Diageo
16
18
33
38
UnlCredlto
. UnileverNV .
15
19
21
DSG International
42
45
15
19
Union Electrica Fenosa
26
27
24
E:bNAG
]8
21
40
44
lJnitedUtilities.l'iC
17
2;2
19
EDF
12
14
17
21
UPM-Kymmene Oyj
46
48
40
Ed~onSPA
18
23
13
16
Valeo
54
57
5.4
Electrolux
Endesa
Enel SPA
Energias de Portugal SA
Energie Baden-WuerttembergAG
35
42
21
23
Vattenfall
16
20
15
18
23
34
'36
'yeoO~J;n;vir9n'6lent -
26
28
·25
19
21
20
25
Vivendi
52
57
46
17
22
18
12
Vodafone
32
.33
31
15
19
20
24
Volkswagen
27
30
25
~·uTo·pea_~:Aer~n.aut:i_c:pefense
VcilvoAB
31
3<1
34
an.d Space Company
15
20
15
19
Wolters Kluwer
46
49
40
Finmeccanica
25
29
17
21
WPPGroupPLC::
26
28
22
Fortum()yj
18
22
21
24
Zurich Insurance
15
18
16
France Telecom
36
39
20
25
NORTHA"'ERICA (C:Dx.NA IG6)
Gallaher
Gas Naturai
Generali
·GKN Holdings Pie
G·leni:ore International AG
GUS Pic
30
33
34
38
Ace LTD
28
33
Aetri'Jnc
II
13
24
2.9
AIG
45
52
12
16
Alean
20
25
105
115
48
55
Aleoa
15
20
47
49
85
95
Allstate Corp
H~n~_9v:e.r.Re
16
18
38
41
Alltel Corp
45
50
Hellenic Telecom
51
56
15
19
.A.ltr;aGroup
.51
57
.
Henkel
17
23
50.
60
American Electric Power
28
33
Hypovereinsbank
10
13
19
24
NrieHC:.nEXpressC"r:R '.
18
I~
Iberdrola
T7
21
II
13
Amgen Inc
Hi3
·ICI
40
45
20
25
,
An
gar~Petro
2:1.
26
ImperfaITobacc"c;roup ·Plc
4~
50
28
33
;Arrow Electronics
54
61
57
IntesaBci
II
14
43
47
Aut"Z".ne
6.4
6~
~O'·
'ny
70.
16
I}
·15
Baxter Inti
21
25
Kingfisher
50
55
70
80
Bo"ingCo.!>C,,1p .
13,
16.
13.
n
Ki"N
75
41
44
Bristol-Myers Squibb
Lafarge
34
38
73
80
BlIrlingconNor't/t"r"
18
21
.'16
[;i\deAG
,45
·35
.~()
4X'
.
Campbell 50up
17
21
Lufthansa Inti
46
49
35
40
CapiiaJOhi"Bank
J5
18
LyMH
2.3·
28.,
#'
54
Cardinal
Health Inc
u
.
Marks & Spencer
34
36
24
27
,Carnival;c:c:>tP :
-.-.
--
!"Iettei~"'~·
32' '
·3.5
34
3~
,Caterpillar Inc
,Michelin
CBS"···
30
33
32
34
ihm02
Cendant

TRADING DESK

Credit

(five years)

16 May 06

25 Apr 06

(five years)

16 May 06

25 Apr 06

bid

offer

bid

offer

bid

offer

bid

offer

NORTH AMERICA (COX NA IG 6)

Centex

54

Centurytel Inc

64

Chubb Corp

Cigna Corporation

Cingular Wireless

14

CIT Group

20

Clear Channel

90

Comcast Cable

33

Computer Sciences

65

Conagra

34

ConocoPhillips

19

Constellation Energy

26

Countrywide Home Loans

34

Cox Communication

55

CSXCorp

21

CVS Corp

15

Devon Energy

13

Disney

Dominion Resources Inc

35

Dow Chemical

19

Duke Energy

Dupont

19

Eastman Chemical

46

EOP

Fannie Mae

10

Federated Department Stores

28

FHLMC FirstEnergy

36

Gap Inc.

83

GECC

13

General Mills

23

Goodrich (RF.) Co.

34

-- 21

Halliburton Harrahs Operating Co

66

Hartford Financial Hewlett Packard

13

Honeywell

16

II

IBM Ingersoll Rand

14

International Lease Finance

20

International Paper

51

John Deere

18

Jones Apparel

157

Knight Ridder

Kraft Foods

17

Kroger Co

40

51

Lockheed Martin

19

LoewsCorp

19

Marriott Inti

29

Marsh & McLennan

MBIA McDonald.Corp Mckesson HBOC

25

MeadWestvaco

61

Metlife Inc Motorola

20

National Rural Utilities

16

Newell Rubberniaid

;26

News America Inc

Nordstrom

Norfolk Southern

19

Northrop Grumman

19

Omnicom

 

24

Progress. Energy Pulte Homes Inc

67

115

Radioshack

19

Raytheon Rohm&Haas

.20

96

Sabre Holdings Safewaylnc _Sara Lee Corp

38

11

SBCCommunicatioris Int Sempra Energy

22

64

Simon Property Group LP

South",est,6;irlin'es

28

-Sprint Nextel Corp

21

Su!,"erYalu Target Corp

146_

NORTH AMERICA (COX NA IG 6)

59

40

45

69

45

50

26

31

19

15

19

23

21

24

95

86

90

35

32

36

75

60

70

42

37

42

21

18

22

29

26

29

37

37

40

65

53

58

24

21

26

25

21

25

21

23

27

18

20

40

37

40

25

23

29

22

20

30

54

47

51

II

9

II

33

28

35

8

10

41

39

41

93.

85

90

16

25

38

35

43

26

70

48

49

18

16

21

19

15

20

16

10

15

24

23

21

23

Temple-Inland Textron Financial Corp The Limited

56

63

61

67

21

26

19

25

50

53

55

60

Time Warner Inc

44

48

43

48

Toll Brothers

85

90

74

84

Transocean Sedco Forex Inc

33

35

24

29

Tribune

50

52

47

56

Tyson Foods

100

105

118

125

Union Pacific Corp USA Interactive Valero Energy Verizon Global Funding WalMart Washington Mutual Wells Fargo Corp

20

25

21

26

72

85

79

84

32

36

31

36

22

28

25

30

8

10

14

20

22

24

27

Wendy's International

103

109

99

105

Weyerhauser

43

48

44

49

Whirlpool Wyeth XL Capital Ltd

35

36

42

18

20

ASIA (iTraxx Asia ex-Japan 5)

Bank of China Cathay Financial Holding Co Ltd Chartered Semiconductor China China Development Bank China Mobile HK LTD Citic Pacific Ltd CNOOC Limited Dev.BkSingapore Export-Import Bank of China GentingBhd HK Land Finance Hong Kong Hutchison Whampoa Hysan Development Hyundai Motors ICICI Bank Ltd

20

25

28

64

67

67

74

21

24

22

25

 

27

80

93

23

26

31

30

40

33

36

34

38

32

42

70

79

71

73

67

70

Indonesia

161

171

170

175

KEPC:O

22

25

S2 55' Kookmin 20 25 24 Korea 22 23 22 159 165 Korea Telecom 26
S2
55'
Kookmin
20
25
24
Korea
22
23
22
159
165
Korea Telecom
26
30
64
72
Kore.nDevefopii\E'rit Bank
LG Caltex Oil
22
25
28
30
72
M~laysia:
25
;29
28
47
52
'Malaysia International Shipping
Maybank
MTRCorp
Noble Group
26
31
29
18
23
24
30
28
34
216
226
220
Overseas Chinese Banking Corp.
Panvas,Gas
-
19_0_
210
220
PCCW-HKTTelephone Ltd
40
45
43
Petrorias
21
25
'65
68
Philippines
171
181
182
Pasco:--
--
31
36
20
2~
PIT PCL
32
35
16
19
Relfa:ntelnd
67
74
62
41
Samsung Electronics
30
35
Singapore Telec.o.11l
SKTelecom
State Bank oflndia
Swire Pacific Ltd
Tata'Motors
Telecom Malaysia
14
1.8
14
28
32
32
17
22
55
65
55
18
23
23
30
65
80
68
28
3~
26
30
30
56
61
T~~aga Nasiori,"
32
38
110
115
-Thailand
37
39
35
19
25
Unit~d'Mic.roele_c_trOnics
35
55
:4cf
82
38
UOB
'{ed~lntaResburces
• Wharf Holdings - HK
1.98
32
42
31
47
"CreJ[it(fe(alJltsW.ap'price,s-aresu~~I;ed6YGFI.v;sltwww.ifig"'QIJ~:Eonior_eniail-'
18
C/idit@gfigroup,corri,(or:more,in(ormatioiJ
23
~I
c28

57

22

174

43

54

22

25

34

26

24

20

32

20

22

29.

73

12'2

23

25•

102

:21-

27

68

32

26

I_51

Credit

D

A"-ABASED ATABASEDATABASEDAT

~I~

DATABASEDATABASEDAT

on"~

,

,_

,

,"_'

'

~I~ DATABASEDATABASEDAT on"~ , ,_ , ,"_' ' '''''' ," _, - ,
'''''' ," _, - , ','"
''''''
,"
_,
-
,
','"
 

Recent corporate and sovereign rating changes

 
 

Date

Borrower

Agency

From

To

Rating type

Comments

16/05/06

1'1 Slovenia

S&P

AA-

AA

sovereign credit

16/05/06

Mediacom Communications

Fitch

B+

B

issuer default rating

16/05/06

1'1 Loews

Fitch

A-

A

senior unsecured

tobacco arm recovers

16/05/06

Eastman Kodak

Fitch

B+

B-

senior unsecured

15/05/06

1'1 Edison Mission Energy

Moody's

BI

Ba3

corporate family

15/05/06

1'1 ABB

S&P

BBB-

BBB+

corporate credit

eqUity-linked bond conversion

15/05/06

1'1 Williams 1'1 Societe Generale

Fitch

Fitch

BB

BB+

AA

AA

BB-

Baa I

senior unsecured senior unsecured senior unsecured corporate credit convenience store chain grows senior unsecured

 

12/05/06

AA-

12/05/06

1'1 Banco Santander CH

Fitch

AA-

12105/06

1'1 Pantry 1'1 Alliant Energy Resources

S&P

Moody's

B+

12/05/06

Baa2

12/05/06

Aeroports de Paris

S&P

AA

AA-

corporate credit

standalone credit quality

12/05/06

1'1 Baxter International 1'1 Toyota Industries

Fitch

S&P

BBB+

A-

senior unsecured

12/05/06

AA-

AA

corporate credit

11/05/06

Cooper Tire & Rubber

Moody's

Ba2

Ba3

senior unsecured

11/05/06

1'1 SK Corp

Moody's

Bal

Baa3

senior unsecured

11/05/06

~ Sincor

Fitch

BB

B+

senior unsecured

Venezuela doubles oil tax

11/05/06

~ Petrozuata

Fitch

BB

B+

senior unsecured

Venezuela doubles oil tax

11/05/06

~ Hamaca

Fitch

BB

B+

senior unsecured

Venezuela doubles oil tax

10/05/06

1'1 Cummins 1'1 Banco Santander CH 1'1 Westar Energy 1'1 Corus 1'1 Capital One 1'1 Baker Hughes

Moody's

S&P

Moody's

Moody's

S&P

S&P

Bal

Baa3

senior unsecured

09/05/06

A+

AA-

corporate credit

profit growth

08/05/06

Bal

Baa3

senior unsecured

senior unsecured

08/05/06

Ba3

Ba2

corporate family

08/05/06

BBB-

BBB

corporate credit

successful Hibernia integration

. 05/05/06

 

A-

A

corporate credit

 

05/05/06

Peoples Energy

Fitch

A

A-

senior unsecured

05/05/06

S&P

S&P

BBB

BBB+

corporate credit

04/05/06

BBB+

BBB

corporate credit

04/05/06

~ American Axle

S&P

BBB-

BB

corporate credit

04/05/06

~ Ciba Speciality Chemicals

S&P

A-

BBB

corporate credit

04/05/06

1'1 Williams

S&P

B+

BB-

corporate credit

02/05/06

1'1 Enersis

Fitch

BBB-

BBB

senior unsecured

02/05/06

1'1 Belgium

Fitch

AA

AA+

sovereign credit

01/05/06

~. Albertson's

Fitch

BBB

BB-

senior unsecured

01/05/06

Supervalu

Fitch

BBB

B+

senior unsecured

28/04/06

1'1 Yum!Brands

Moody's

Baa2

Baa I

senior unsecured

28/04/06

FS Funding

Moody's

BI

B2

senior unsecured

ISS Global raises bond size

27/04/06

1'1 Kerr-McGee

Moody's

Ba3

Ba2

senior unsecured

27/04/06

1'1 Raytheon

Moody's

Baa3

Baa2

senior unsecured

Guidant acquisition Knight Ridder acquisition Supervalu plans to buy grocer levers up· to buy Albertson's
Guidant acquisition
Knight Ridder acquisition
Supervalu plans to buy grocer
levers up· to buy Albertson's
buys LSEshares
asbestos liabilitiescapPE!d

24/04/06

Iran

Fitch

BB-

B+

sovereign credit

21/04/06

~ Boston Scientific

S&P