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They Know Their Maths

22 July 2016 by lberuti

Yesterday the auction to settle the pay-out of the CDS referencing PORTEL (Portugal Telecom) was held by Markit and Creditex. Bonds were valued at 20cts on the euro, which means that an investor who bought 1M€ of protection maturing after the credit event date (which was deemed to have taken place on the 20th June 2016) will get an 800k€ payment form the person who sold him protection. It was a widely anticipated auction as it will dictate the pay-out of roughly 3,000 contracts covering a nominal just shy of a €1Bln. It also meant that all the credit indices that included PORTEL when they were issued had one fewer constituent this morning. Because investors anticipated the recovery would be quite low on PORTEL, it was contributing significantly to the risk premia of many indices, and was adding anything between 25bps (for ITXEX525) to 95bps (for ITXEX517). One could have feared a pretty shambolic situation, but dealers did a good job at factoring this situation in their quotes and the Crossover bases complex remained consistent as shown by the above grapple for instance.