02 June 2014 by HCM
The market shown us today exactly how orphaning expectations can impact the risk premium of a reference entity. The first mover of the day was ALUFP (Alcatel Lucent SA) whose 5 year CDS traded up to 25bps wider as they announced a new dual tranche convertible bond. The widening took place in anticipation of hedging activity by CB buyers, but also because the CBs should be deliverable into ALUFP’s CDS. This alleviated recent fears that ALUFP could become an empty box. Conversely, AFFP (Société Air France) finished the day 30bps tighter as they announced a new issue which, according to some in the market, may not be deliverable into the CDS. This brought back the orphaning story to the fore, and the CDS, which is already pricing in a decent probability of this happening, received another nudge.