TSX:TECK.A - Post by User
Post by
smoking81on Oct 02, 2015 12:52pm
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Post# 24157615
It Could be Just a Hedging Strategy
It Could be Just a Hedging Strategy Scotiabanks Credit Desk provides a quick explanation on why Teck CDS spreads have blown out beyond their 2008 levels: basically, given the recent rout in TCK.B bonds following Moodys and S&P downgrades in September ( TCK.B bonds did NOT perform well), smart money in hedge funds are buying 5-year CDS protection against a Teck default and then going long the long bonds, now priced in the 50s. The strategy being played out is this:
- If Teck defaults, its likely to be between now and the Revolver maturity…in other words the next 5 years
- If Teck does indeed default, you get a recovery on the CDS position (lets say, perhaps greater than 55 cents) and hold bonds with a decent coupon at say 55 cents
- If Teck makes it past the Revolver maturity, the hedge fund bought insurance it didnt need but used the coupon on the long bonds to pay for that very same protection. At this time, your protection expires and the long bonds rally because Teck is now presumably in “good shape” because theyve likely refinanced the Revolver in question.
Basically, it ends up being an asymmetric trade to the upside….little or no carry for 5 years, and potentially HUGE upside if Teck makes it past the revolver maturity, and also protected to the downside if Teck does indeed default in this same timeframe.