Asian credit protection market restarts higher

London, Sept 20: Liquidity returned to the market for credit protection on Asian sovereign and corporate debt issuers this week after trade froze in the wake of the attacks on New York and Washington, traders aid.

Default swap prices were higher across the board when the market restarted, with the most dramatic increases coming in Japanese airlines, the only Asian airlines with an active market in credit protection.

Default swaps, the most liquid type of credit derivatives, are insurance-like tools that allow investors to hedge or gain the risk of an issuer defaulting on a bond or loan. The buyer pays the protection seller an annual premium measured in basis points (bps).

“At the end of last week there was definitely nothing...this week there have been trades all over the place,” said one trader with a US bank in Tokyo.

Five-year default swaps on Japan Airlines (JAL) were quoted at a bid/offer spread of 130/200 bps on Thursday. These swaps were reported as having traded at 130 bps on Wednesday. They were trading at around 50 bps before the attacks on the US. An expected sharp drop in air travel has led to widespread fears about the stability of many airlines.

Trading in default swaps on Japanese banks also reopened at significantly higher levels. Five-year default swaps on the senior debt of Bank of Tokyo-Mitsubishi, the bellwether of the sector, were quoted at 55/65 bps on Thursday, 15 bps higher than pre-attack levels. Similar swaps on the other banking names were quoted at between 10 and 20 bps above the levels seen early last week.

Japanese retailer Mycal’s filing for bankruptcy protection last Friday was seen by some traders as partly to blame for the increase in banking default swaps. Mycal owes billions of yen to Japanese banks.
However, other traders saw the refusal of the banks to prop up the ailing retailer as a positive sign that the Japanese banking sector was embracing reform.

“They really cut the cord to Mycal and that’s a positive step. That’s what we need to see the banks do,” said a trader with another US bank.

Dealers reported heavy trading in default swaps on Japanese telecoms operator NTT DoCoMo this week. Six or seven trades in the five-year default swap, worth $60 or $70 million, were reported at 42 bps. These swaps normally trade just once or twice a week.

“It’s really the widest (highest price) I’ve ever seen it,” said one trader.

The rise in NTT’s default swaps was on the back of recent volatility in the telecoms sector generally. Default swap prices on the main European telecoms providers have almost doubled in recent weeks to around 180 bps. “I don’T think there was anything driving it except for the relative tightness (low price) vis-a-vis the European names,” the trader added.

Prices of default swaps on the sovereign debt of Korea and Malaysia also rose on war fears but traders said levels had settled down after an initial spike.

Five-year default swaps on Korea were quoted at 115/125 bps on
Thursday.

— Reuters