New high yield index could suffer liquidity problems, warns Barcap

The new series of the North American high yield index, which begins trading today, could face liquidity challenges, says Barclays Capital in its latest Credit Alpha report. CDX NA HY 17 includes no fewer than 10 new names - some of which have low volumes in the single name credit default swap market and which may therefore be difficult for traders to source.

The rules-based approach to constructing the index has also thrown up other problems, say the analysts, describing the inclusion of SRAC as troubling. This credit is included on the grounds that it is in the financials sector, a classification the report calls "dubious". It also points out that switching from Avis Budget Car Rental - the hire car firm's operating company - to Avis Budget Group (the super holding company) makes little sense. The newly added reference entity has only convertible bonds outstanding. Its higher CDS volumes compared to the opco may by driven by terminations of contracts referencing predecessor Cendant, according to Barclays.

Finally, the report slams the decision to kick out Univision, a benchmark name with more than $2 billion of index-eligible debt. Dealers voted to remove Univision in order to retain Liz Claiborne, a highly liquid name in the single name CDS market.

The intrinsic value of the new series is 1.8 points less than its predecessor, says the report, with 1.23 the result of duration and 0.57 owing to the slightly worse credit profile of the new portfolio.