Bloomberg News

New Loan Derivatives Index Rallies in First Day of Trading

October 03, 2007

A new version of the benchmark loan derivatives index, which added the leveraged buyout debt of First Data Corp. and Tribune Co., rallied on its first day of trading in a sign that demand for the debt is returning.

The LCDX Series 9 rose to 99.7 after falling earlier today to as low as 99.4, according to New York-based Goldman Sachs Group Inc. The index of credit-default swaps, which traded as high as 99.8, is tied to the loans of 100 companies with high-yield, high- risk ratings and is used to speculate on the ability of the companies to repay the debt or hedge against the risk they won't.

The gap between the new index and the previous benchmark widened, bucking expectations that investors betting on a deteriorating market would push the gap lower as they rolled their positions, said Alan Alsheimer, the LCDX trader at Goldman.

``The big surprise is that for a product that has seen so many shorts through it, is that we've actually traded up on the day,'' Alsheimer said. Goldman traded LCDX contracts based on more than $5 billion in debt today, he said.

The index of credit-default swaps, first created in May, has become a proxy for the health of the leveraged buyout market as Wall Street looks to sell more than $300 million in debt to finance pending deals.

Series 8 of the index fell to as low as 90 in July as demand for debt dried up amid the worst credit rout in almost a decade. Series 8 has since rebounded to 97.35 on signs that higher risk premiums and easing credit constraints are luring investors back.

The new index includes the $9.4 billion in loans sold last week to fund the buyout of First Data, the credit-card payment processor acquired by Kohlberg Kravis Roberts & Co. Chicago-based Tribune, which is being bought in an LBO by billionaire investor Sam Zell, also was added to the index.

The Roll

The index rallied as the risk of owning corporate bonds also fell. The CDX North America Investment Grade Index Series 9, a benchmark for the cost to protect bonds from default, fell 0.75 basis point to 51.25 basis points, according to Deutsche Bank AG. A decrease in the index signals improvement in the perception of credit quality.

Dealers that trade the credit-default swap indexes create new versions every six months to remove companies that no longer fit ratings criteria or are no longer among the most actively traded credit-default swaps. The switch to the new index is known as the ``roll.''

The LCDX ``is going to trade in a range on roll day because there's going to be large volumes as many people look to move their positions to the on-the-run liquid index,'' Brad Rogoff, a high-yield credit strategist at Lehman Brothers Holdings Inc. in New York, said today in an interview.

First Data and Tribune were among 10 companies added to the index, replacing companies including a subsidiary of Chiquita Brands International Inc. (CQB:US) and Reynolds American Inc. (RAI:US)

Risk Premium

The index changes add about 13 basis points to the risk premium, Glen Taksler, a credit derivatives strategist at Bank of America Corp. in New York, wrote in a note yesterday. An extra six months tacked onto the maturity of the five-year contracts adds 9 basis points more, he said.

Dothan, Alabama-based Movie Gallery Inc., the U.S. video store chain that failed to make a Sept. 10 interest payment on its second-lien loans, was removed from the new index. The missed interest payment qualified as a ``credit event'' that will trigger the first payout for investors who were betting against the index.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Emma Moody at emoody@bloomberg.net


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Companies Mentioned

  • CQB
    (Chiquita Brands International Inc)
    • $9.99 USD
    • 0.01
    • 0.1%
  • RAI
    (Reynolds American Inc)
    • $58.16 USD
    • 1.49
    • 2.56%
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