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HET (Caesar): Bets Are Off

20 February 2015 by lberuti

The HET’s (Caesar) saga eventually came to an end, as far as CDS are concerned anyway. After a protracted legal debate, it was decided a couple of weeks ago that the company effectively defaulted on the 15th January 2015, and the auction settling the pay-out of protection buyers was held yesterday. They will receive 84.125cts per dollar of protection they owned. That also means that HET was stripped of the CDXHY index yesterday night. The CDXHY series 23 now includes 99 names, and one of the distressed names has been removed. Because the risk premium of CDXHY can very roughly be seen as the average risk premium on its constituents, CHXHY was 20bps tighter today. But because CDXHY23 still includes RSH (Radioshack) which officially defaulted on February 5th and which also has a very wide risk premium, it is still artificially wide, and will remain so until the auction settling the payout of CDS buyers takes place. This auction should be held early March, and everything else being equal, CDXHY will be another 20bps tighter the next day. That will send CDXHY23 to its tighter level ever, and, because of the stress in some HY compartments like energy for instance, many start to question the level it is trading at. CDXHY/CDXIG decompression will no doubt be a recurrent theme over the next few months.