"Picking Up Iceland’s Dregs" -
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One day before the anticipated auction to settle the credit-derivatives trades of the three major Icelandic banks that were recently taken over by the state, the outlook for those who sold protection against default is sort of like Iceland’s plains: harsh.
The bank debt of the largest banks is trading at levels that render it basically worthless. Kaupthing Bunadarbanki senior bonds are trading at four to five cents on the euro, while the bank’s subordinated bonds are quoted at one to two cents on the euro, said a dealer.
Glitnir Banki senior debt is currently at 2.5 to 3.5 cents, while subordinated debt trades at 0.75/1.75 cents, and Landsbanki Islands senior bonds trade at the biggest discount, down at two to three cents and subordinated bonds at one to 1.5 cents.
Those who sold insurance against the default of this debt are looking at big losses. As the banks have taken over the bankrupt banks, all bets are off, and the trades are going to be settled at a pittance. The three banks were taken into receivership by the Icelandic government earlier in October.
The Landsbanki auction will take place Tuesday, followed by Glitnir and Kaupthing auctions on Wednesday and Thursday, respectively.
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Comments
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Unless I’m missing something, this post makes absolutely no sense at all. Buyers of protection get paid out par value less the recovery amount of the bonds. The best estimate of the recovery amount is the market price. So if you’re long protection you receive $1 minus 3 cents = 97 cents.
Correct me if I’m missing something. If not, try to understand the markets you’re writing about before you post.
Comment by GDM - November 3, 2008 at 3:00 pm
I have to agree with GDM. The fourth paragraph of this story makes no sense.
Comment by Me2 - November 3, 2008 at 3:35 pm
I think the para makes sense.
The debt was insured by some large European synthetic CDO funds - these are insurance like products who guarantee the basic dept.
If the debt recovers 3cents on the euro - the sCDO holders will stump up 97cents to cover the shortfall.
Comment by Enumerate - November 3, 2008 at 4:13 pm
Moral Hazard is enchanced when the greedy guilty are punished, their heads placed on pikes and praise and honors are awarded to the non participants.
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