22 May 2015 by pdonnat
Grohe CDS is an "orphan" CDS. There is no public debt to deliver into the CDS. Most credit traders were familiar with the credit story. The CDS was in Xover Series 3 to 19. Late in 2013, Lixil Group Corp bought the company and replaced Grohe public financing with company financing. Grohe was left without public debt. Over the last year, the CDS has traded sporadically. Legacy positions or off-the-run iTraxx basis were the only sources of trading. The CDS residual value was the out-of-money option of an unlikely refinancing at Grohe level and any bank debt if deliverable into the CDS. Grohe bought Joyou a Chinese manufacturer in 2011. Due to a fraud made public yesterday, Joyau shall apply for insolvency. As a consequence, the CDS is in unchartered territory. The CDS widen by 200bps with any reported trade. To which extend the fraud could weight on the complex company structure? To which extend the shareholders are liable for their lack of diligence. The case is open and we can expect that investors should clear their risks on Grohe rather than speculating on any outcome. We expect some liquidity on Grohe’s tap, however not like in the good old days.