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Wind whips up a CDS storm

First non-investment grade trade shows the spoils to come in distressed debt trading.

The leveraged buyout of Italian telecom operator Wind has broken a number of European capital markets records: not least it is the largest-ever European buyout deal. It has not been the easiest of refinancings; syndication of the €6 billion senior loan took a very long time over the summer, and in the autumn the arrangers were forced to pay up and restructure the second lien loan.

Adversity often spawns innovation and last month Wind became the basis for the first credit default swap on a non-investment grade name, aside from former fallen angels. GFI brokered the swap between DrKW and Morgan Stanley at 337.5bp for five-year first-lien risk, which was triggered by the fact that there is a considerable amount of Wind loan paper unsold.

This trade will prove significant if it heralds the beginning of a new CDS market segment increasing the liquidity available to fund leveraged buyouts. Players will now be able to hedge exposure to bonds or loans risk by buying credit protection.

If the three LBO arrangers – ABN Amro, Deutsche and San Paolo IMI – are, as rumours suggest, still long €1 billion each of the senior loan, it is not down to credit concerns but due to controversy surrounding the loan’s syndication.

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