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What 5 Year CDS Tells You About 1 Year CDS?

02 June 2016 by lberuti

WFT ( Weatherford International Plc ) was one of the star performer today, and it had nothing to do with the rebound of oil towards $50/barrel from an intraday low yesterday of $47.8. The company announced today the pricing of an upsized underwritten offering of $1.1bln exchangeable notes due 2021. The proceeds will be used to fund tender offers for front-end bonds, notably the ones maturing in 2017 and 2017. Not only did that send the 5 year risk premium almost 4pts tighter at 28.75pts (plus 100bps running), but the risk premium curve steepened meaning fully. So much so that we are now it the weird situation where the 1 year risk premium of WFT is trading at 88bps which is roughly the same level as the 1 year risk premium of APC (Anadarko Petroleum Corporation), CNQCN (Canadian Natural Resource Ltd) or ENB (Enbridge Inc), while WFT’s 5 year risk premium is worth 938bps and those of APC, CNQCN or ENB are worth 267bps, 268bps and 290bps respectively. Some say it is a relative value opportunity, others it is just rational thinking.