Creditflux Newsletter

Short-dated credit default swap protection on heavily indebted British chemicals company Ineos continues to see active trading around speculation that senior secured lenders will again extend covenant waivers in mid-July.

The May extension is said to have caught out many buy-side players who held short credit default swap positions on the name.

Dealers report that there was little profit-taking by buy-side accounts prior to the news, despite five-year Ineos CDS having reached 85 points upfront and June 2009-maturity protection out to 60 points upfront.

In other words, those who had gone short the widely traded credit hung on to their positions in the expectation that the company’s fortunes would worsen.

In reality, when Ineos secured its covenant waiver, credit default swap spreads collapsed. The five-year contract gapped in to around 60 points upfront during June and the short-dated contract was squashed down to just one point upfront before it matured in late June.

“Traders are now looking at September and December 2009 CDS maturities,” says one London-based distressed credit trader. “A further waiver would have a significant impact.”

Bond prices tell a similar story, and a company that was once widely predicted to follow Lyondell­Basell into bankruptcy has now bought itself breathing space.

Like Lyondell­Basell, Ineos is a highly cyclical chemicals company that faces increased competition and heavy exposure to the troubled automotive and construction sectors.

However, unlike Lyondell, Ineos’ €7.9 billion of debt is largely owned by European banks rather than aggressive hedge funds. This has given the company some leeway, and taken pressure off the unsecured bonds.

The company’s loans are also widely held by European CLOs. According to Creditflux CLO Master, just over $1 billion of Ineos institutional term loans and $142 million of pro-rata loans are owned by CLOs. It is such a big holding that managers are incentivised to enable the company to avoid a default.