Wind whips up a CDS storm


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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. There was much debate about the fact that another tier of banks was not introduced to sell down the loan.

In contrast to the loan, the noise surrounding Wind’s B3/B– rated high yield dual tranche 10-year bond in November was positive. The telco successfully printed some €825 million at 9.75% (626bp over Euribor) and a 10.75% $500 million tranche at 627bp over Libor.

The sheer amount of Wind paper issued should have tested the market’s resilience but it seems that any credit concerns have been dispelled by the success of the capital markets takeout of most of the €1.65billion bridge loan: a €500m PIK note is yet to come.

Few observers believe that increasing leverage and aggressive structures are a hindrance. If one type of buyer is less accommodative then another group of investors will step into the breach. Especially with smaller transactions, the high yield bond sector is in danger of being cut out by mezzanine and second lien markets, in particular where credits have outperformed and private equity firms are keen to retain flexibility. The senior leveraged loan market is becoming a capital market; the managed CLO pipeline provides evidence of this and also suggests there are forced buyers of credit [see structured credit news, this issue].

Hedge funds, CLO managers and bank investors might be ignoring signs of a frothy market – with some credits failing to hit financial targets – but the investment banks who are behind these deals are not. Already some of the arrangers, such as CSFB and Lehman Brothers, have been spotted creating proprietary distressed debt teams in anticipation of the spoils to come. Areas to watch are autos, auto suppliers, UK retail, packaging and specialty chemical firms.