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Insuring or Canyoning

29 September 2016 by pdonnat

The monoline MBIA AAA is the shadow of what it was before the Global Financial Crisis (GFC), but its CDS is still active as the company is one of the member of the CDX high yield indices, including the latest vintage, the CDX High Yield Series 27. During the GFC, a lot of investors having bought insurance contracts from MBIA on their CDO tranches used the CDS market to hedge their insurance contracts. Skilled in tour de force, the monoline achieved not to trigger a credit event. As the attached grapple displays, the CDS time series has large gaps in the premium of MBIA AAA’s CDS. MBIA has announced today that the company is selling its UK subsidiary to Assured Guarantee Corp, another monoline. The CDS upfront premium is dropping by 15% from 40% to 25%. The company is approaching the home stretch. If the company can restructure its remaining commitments on the Zohar II notes it will be out of the wood but it is far from a done deal.
Meanwhile, the strength of the equity market did not spread to the CDS market where the financial sector what under pressure. The indices are closing unchanged on a weak tone.