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What A Default Does To CDX HY

12 October 2017 by lberuti

Looking at the above grapple, you could be forgiven to imagine that the HY universe in the US is a much safer place today than it was yesterday. All series of CDX HY (except series 29 which does not appear yet on DataGrapple anyway) have seen their risk premia decrease meaningfully. In fact, the latter were roughly unchanged across the board. But while CDX HY indices previously enabled you to be compensated for loss arising from the recent default of TOY (Toys R Us), it is no longer the case. For instance, if you bought $100mln of protection on CDX HY 28 on Wednesday, you would have been entitled to receive 740k$ as a compensation for the default of TOY. That amount was decided yesterday after market participants had the opportunity to take part in an auction aimed at estimating what bondholders could ultimately get from the company if they hold on to their securities. After the auction, TOY was effectively stripped from the index, and CDX HY S28 has now only 99 constituents, down from 100. The residual maturity of CDX HY S28 is roughly 4.5 years (it matures in June 2022), so the 740k$ protection buyers got yesterday are worth 165k$ per year, which is 0.165% of the $100mln. That is pretty much the amount (17bps) that was taken out of CDX HY S28 risk premium.