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How Often Can You Default?

03 February 2017 by pdonnat

NSINO ( Norske Skogindustrier ) already orchestrated last year a restructuring of its debt, which eventually led to a credit event back in April this year. But because it was not deemed a failure to pay its creditors, the triggering of CDS was left up to buyers of protection, and most of them decided to hold on to their “insurance” contracts as they decided to wait and see if further down the line a better pay out could be obtained in case of hard default. They might be vindicated. The company decided yesterday to pre-announce that Q4 2016 results would be below Q3 because of the appreciation of the Norwegian Krona against the Euro and the Pound. They also said they had ended discussions with “a selected group of investors” aimed at refinancing and extending maturities of NSINO’s capital structure. If people knew of NSINO’s intention to address its shorter-term debt, they did not expect such discussions to be already under way, and they certainly did not expect them to come to such an abrupt end. They swiftly factored the news in the short dated risk premium of NSINO. The one-year maturity for instance shot up from 1500bps to 3435bps and the one year probability of default implied by the CDS market is close to 40%.
Meanwhile, the credit market was well oriented all day long. Post yesterday iHeartMedia CDS auction settlement at 35.5 cts, all high yield indices in the US are trading without iHeartMedia implying a price increase by at least 64.5cts. The CDX high yield on the run series traded today one point higher well above 107.