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Orphan… No More!

18 April 2017 by lberuti

Following the full redemption of UNILSUB’s (Unilabs Subholding AB) senior secured fixed rate and floating rate notes initially due in 2018 and the redemption of their second lien PIK notes initially due in 2019, the company has had no outstanding debt since October 2016. This redemption had long been anticipated, and UNILAB’s 5-year risk premium had been reflecting a very low probability of default long before this date, as the above grapple shows. But even in early 2017, albeit low, UNILSUB’s probability of default has never been zero. Indeed, a 5-year CDS protects the buyer for a 5-year period, and no deliverable debt at one point in time does not necessarily means that no debt will ever be deliverable. The issue of €250mln of 8-year by UNILSUB today vindicated investors who held to their CDS contracts since last October. From a low of 90bps at that time, UNILSUB’s 5-year risk premium shot up to 380bps today at the close, which more than makes up for the premium they had to pay during this 6-month period. CDS contracts referencing entities with no deliverable debt are known as “orphaned” in the market, but unlike us human, a CDS is orphaned until it is not.