02 March 2018 by pdonnat
March 20th, the market will start trading the new vintage of credit indices, Series 29 in Europe and Series 30 in the US. The maturity will be extended by 6 months and the composition adjusted according to index rules. In Europe, the crossover is again challenging. According to the rules, many names must get out as their CDS premium is too tight. The synthetic community will use the index to create liquidity on new reference entities. Likely, the non-investment grade issuer Picard, a well know French quality frozen food company will be added to the index. The company has more than 1BEuros of debt following 2 successive LBOs. The company is 100 years old, it survived its LBO, will it survive its CDS? Given the ‘addiction’ of the French to Picard, there is little doubt. There is more risk to have a transient CDS. It happens a lot in the high yield universe. In the US, PHH, the mortgage servicer, announced this week its purchased by Ocwen Financial, a very weak B credit. PHH credit quality is badly negatively impacted. PHH CDS was one of these transients, it was included in the US high yield indices, from vintages 18 to 26. According to OTCStreaming, there are 20BUSD of open interest on these vintages. PHH represents 1% of these indices. Investors have around 200MUSD PHH exposure induced by the indices. It was nevertheless difficult in the last few days to find a market, an indication at best, on this name. Trading new names on the market is a very good development but it should imply a servicing commitment over the next 5 years.