CDX HY index hit by new default

Canadian phone equipment maker Nortel Networks today filed for bankruptcy protection and triggered credit default swaps contracts referencing the company. Nortel is widely held and has been a consistent inclusion across different CDX HY series. Its low expected recovery will add further impact to the index and junior tranches already hit by defaults such as Tribune, Tembec and Lyondell Chemical.

Five-year Nortel CDS had previously been quoted at around 82 points upfront plus running spread, with bonds fallen into the 15-20% range. One desk quoted expected recovery following default as anywhere between five and 15%, although another thought 20% more likely. Such differences in pricing estimates may have contributed to the heavy trading and volatility of Nortel bonds throughout the day, with some desks claiming $100-150 million flow on the name.

According to a 10 November 2008 SEC filing, Nortel has $4.48 billion of debt outstanding. Nortel made its filing ahead of a $107 million interest payment due tomorrow and was granted protection by the Ontario Superior Court of Justice in Toronto. Its US subsidiary made a Chapter 11 filling in Wilmington, Delaware, while fourteen affiliates of Nortel's financing unit also sought protection in Delaware. Five of these were under Chapter 15, a form of US bankruptcy for non-US companies. A further filing was made in the UK.