Delphi Bond Investors Scramble To Satisfy CDS Contracts

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This article appears courtesy of Institutional Investor
Source: Credit Investment News
Kim Moore

Delphi's bonds jumped 12 points across the board as investors sought to get hold of bonds to deliver for credit default swap contracts. Delphi's 6.55% '06 bonds jumped to 67 from 55. Investors have to deliver bonds into their credit default swap contracts within 30 days of Delphi's bankruptcy filing to be paid back at par. The company filed for bankruptcy Oct. 8. The main reason bond holders are rushing to deliver bonds is because single-name trades will not be included in the protocol that the International Swaps and Derivatives Association is developing to cash settle credit derivative contracts related to the bankrupt auto parts maker.

ISDA has developed index protocols for bankrupt airlines NorthWest Airlines, Delta Air Lines and bankrupt auto parts maker Collins & Aikman. Delphi's protocol is more complicated to develop because of the large amount of single-name and tranche trades. A draft of the protocol was due out on Friday. A source familiar with the protocol said uncertainty over whether single-name trades would be included in an index protocol had the market a little jumpy. "With news filtering out that they won't, the price may have been pushed up as traders scramble to get hold of bonds to deliver in their single-name contracts," he said. ISDA officials did not return calls by press time.

Single-name trades will not be included because it would take too long to settle trades. "Some people were looking to extend this to single-name, but with such a huge issue as Delphi it was felt that we should take one step at a time," the source said. "Also, for single-names not everyone wanted cash settlement." But he added that parties on single names should not worry about not being included in the protocol because they will be able to buy bonds at the price settled upon at the auction following the protocol. "Single-name trades are not explicitly covered in the protocol," he said. "But when they see the protocol they will see that a mechanism has been put in place for those who haven't got the bonds to obtain them at the same price that results from the auction. Hopefully, the bonds will stop being bid up once that happens."