For all its increased transparency, standardization, and liquidity, investors should treat the credit derivatives market with caution in 2005.
In a November report that focused on the high-yield credit default swap market in the US, Fitch Ratings looked at some of the issues surrounding restructuring as a credit event. Restructuring through a distressed debt exchange could be particularly problematic.
Using a sample of 16 high-yield bonds, Fitch found that investors who bought at or close to par could lose between 40% and 60% of their investment by the time a distressed exchange has occurred. But buying protection in the CDS market might not fully make up for the shortfall because most high-yield CDS don't cover the protection buyer specifically in the event of a loan restructuring or distressed bond exchange.
Beware lack of protection
?The fact that most high-yield loan restructurings and distressed exchanges effectively are not credit...
