March 25, 2020 / 4:42 PM / 14 days ago

Default fears spark up to fourfold surge in CDS trading: IHS Markit exec

LONDON (Reuters) - Concern that the coronavirus crisis will trigger a wave of bankruptcies globally has prompted a three to fourfold surge in the trade of credit default insurance, particularly focused on airline and travel firms, an IHS Markit official said on Wednesday.

As countries clampdown on the movement of people to contain the disease’s spread, governments and businesses are facing tighter funding pressures as economic activity nosedives.

That is leading more financial institutions to bulk up on credit default insurance as a way to guard against the increasing risk of some firms and sovereigns going bust.

“In the last few weeks during this crisis period there’s been a material increase in percentage volumes of CDS (credit default swaps). Daily volumes ​of CDS index trading have been up 3 or 4 times compared to non-stressed periods,” said Gavan Nolan, director at IHS Markit, a financial information provider.

“Institutions are looking to macro hedge credit risk and CDS ​indices are the most liquid and effective instrument to hedge that risk. We are also seeing the return of idiosyncratic risk ​and an increase in single name trading, focused on airlines and travel.”

Many airlines are fighting for survival as flights are grounded because of a collapse in demand and air travel restrictions over fears of contagion. Delta Air Lines (DAL.N) DAL5YUSAX=MG has seen its five-year CDS jump to 638 basis points, its highest level since the end of 2012.

The Markit iTraxx Europe crossover CDS index ITEXO5Y=MG, which measures the cost of insuring exposure to a basket of sub-investment grade European companies, is at 545 bps, nearly 300 bps up from a month ago.

SOVEREIGN STRESS

Stress is also building among certain sovereigns, particularly those that were in trouble before the virus outbreak.

In a move that will trigger payouts for holders of Lebanon’s default insurance, the EMEA Credit Derivatives Determinations Committee this week ruled that a ‘failure to pay’ credit event had occurred after the country failed to pay principal on its $1.2 billion Eurobond due on March 9. [nL8N2BI2GK]

Lebanon will discontinue payments on all its foreign currency Eurobonds, the government said on Monday, as it struggles to overcome a months-long crisis. [nL8N2BG4CZ]

Argentina and Ecuador were also under “extreme stress”, said Nolan, adding the former’s debt was pricing in high probability of default.

“Its atypical. It would be a first to have three sovereign CDS being triggered in one year,” said Nolan, adding that Lebanon was the first triggering of sovereign CDS since Venezuela in 2017.

The Americas Credit Derivatives Determinations Committee is determining whether a potential repudiation or moratorium has occurred on Argentina’s debt. [nL8N2BG6ZY]

Ecuador will use a 30-day grace period on some bonds to delay making around $200 million in interest payments due this week, and will devote those funds toward containing the coronavirus outbreak, it said on Monday. [nL1N2BH004]

Editing by Angus MacSwan

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