Barclays suggests Cognis as event risk basis play

Barclays Capital calculates that the difference between cash bond spreads and credit default swaps has tightened to a mere 83 basis points, for names in series 11 of the iTraxx index, with the average basis for series 12 names standing at 103bp. In its latest Credit Alpha research report, the bank suggests that basis traders should concentrate on names with a basis of more than negative 100bp.

It suggests, for example, buying Cognis 9.5% 2014 bonds which, at a price of 102.75 are at a z-spread of 656bp. The analysts suggest that the private equity sponsors of the German chemicals company could exit this year, making the name an event risk play. There is a risk that the bonds are called and the company is left with no debt outstanding. To take account of this orphaning risk, the analysts suggest hedging the bonds with short-dated credit default swaps, buying one-year protection at 126bp, for example.