Contents

CDR Liquid Index data as at 2 April 2007

Source: Credit Derivatives Research

CDR Liquid Indices
The CDR Liquid indices represent the CDS levels of the most-liquid names in their respective markets and ratings classes. Liquidity is measured by the number of bid-offers a credit receives. Index values are simple averages of on-the-run five year CDS levels.

CDR Global Market Depth™
The CDR Global Market Depth Index is a daily measure of how many names are actively traded. Liquidity is measured by the number of bid-offers a credit receives. Index values are counts of the number of names that exceed CDR's Liquidity Floor.

CDR Global Market Activity™
The CDR Global Market Activity Index is a daily measure of activity within the global CDS market. Liquidity is measured by the number of bid-offers a credit receives. Index values are simple averages of total bid-offers of all names that exceed CDR's Liquidity Floor multiplied by CDR's Global Base Liquidity Constant.

Queen's Walk stumbles

Publicly listed credit fund withdraws dividend forecast

Cheyne Capital's Queen's Walk Investment Limited, the closed-end investment company listed on the London Stock Exchange which invests in and manages a portfolio of subordinated tranches of ABS, last week withdrew its dividend forecast as its share price plummeted. The move has been attributed to sub-prime related losses, but there are suggestions in some corners of the market of additional causes.

In a statement the company says: "While Cheyne Capital continues to evaluate developments in the US sub-prime market, it has determined that the adjustment of assumptions to current market projections and the impact of these adjustments on income recognised in respect of the company's US investments in prior periods may have a material adverse impact on the company's distributable profits for the quarter ended 31 March 2007."

Furthermore, it adds: "Given the continued uncertainty with respect to borrower prepayment behaviour in the UK, Cheyne Capital believes that further adjustments will be required to its prepayment assumptions and the effective yields that have been booked for the company's UK investments. These adjustments are likely to further reduce the company's distributable profits for the quarter ended 31 March 2007."

For these reasons, Queen's Walk is withdrawing its dividend target of €0.22 to €0.25 per share for the quarter ended 31 March 2007 and its dividend target of not less than €1.00 for the financial year ended 31 March 2008. The company will revisit dividend guidance – and whether it is in a position to provide further guidance on target dividends – going forward in the course of finalising its results for the financial year ended 31 March 2007.

One structured credit investor explains: "There seems to be little good news relating to the assets in the fund. They've taken down a bunch of US sub-prime RMBS, the equity from some ABS CDOs managed by Cheyne and some UK sub-prime where the lock-out rules have changed and pre-pays and defaults are on the rise. And the leverage is also causing problems."

In addition, he says: "A significant chunk of the fund is invested in Cheyne hedge funds, so it's all a bit close to home – good thinking boys. There are, of course, plenty of people that should be buying CDO equity but the retail market is probably the last place you want to go."

But the fund's exposure is only one issue, according to an ex-investor in it. "For someone to drive a business from €12 a share down to about €6 is shocking and a result of bad management and nothing more. The reality is that if you lose the faith of shareholders – and you lose it quickly – you have to pay the price. Ultimately, the peril of running a public company is that it has to be run by people who know how to run a public company. It is imperative to look after the shareholders and keep them on your side by not making promises that you can't keep, rather than taking what you might call an investment bank attitude. Consequently, I suspect that all the individual and real money in the fund has moved and the only investors left are hedge funds."

Circumstances for the fund may change, however. "This could create a very interesting opportunity – the situation is not beyond repair and if the right team were put together who knows what may happen," says one source.

For its part, Cheyne says: "The company is continuing its efforts to seek the approval of shareholders, in accordance with the "whitewash" procedures of the City Code on takeovers and mergers, to effect repurchases of shares in circumstances where, as a result of such repurchases, the holdings of Cheyne ABS Opportunities Funds LP (which holds 44.1% of the company's shares) and parties deemed by the Code to be acting in concert with it may increase."

MP

Futures yet to pick up

Difference of opinion over new contracts keeps volumes low

Volumes in the first week of trading of iTraxx futures on Eurex have been sluggish even by new contract standards. Some observers blame continued resistance from dealers as the primary cause.

As one hedge fund manager says: "Credit futures make my life easier in terms of mark to market, in terms of margin, in terms of the size I can trade – in terms of everything. So it's not the buy-side issue that's holding the contracts back, it's the lack of dealer participation and the frankly ludicrous position that some of them are taking."

Certainly there have been a number of conspiracy theories on the issue doing the rounds, with a small number of banks in particular being accused of throwing their weight around. However, concerns over the new futures relying directly on the ISDA auction process to determine a recovery rate in the event of a default now involve ISDA itself.

The trade association says in a statement: "ISDA's primary purpose is to encourage the prudent and efficient development of privately negotiated derivatives. The development of the auction methodology for settlement of OTC credit derivatives transactions was designed over the past 18 months to encompass solely that universe of trades subject to participation in the auction administered though ISDA."

ISDA has commissioned research into the potential impact of futures on the auction process. "In commissioning an analysis of other trades on this process, our primary objective is to ensure that the integrity and transparency of the auction methodology is not adversely affected by the influence of additional products on the Final Price," it says.

The decision to further investigate the issue has some merit, according to some market analysts. One says: "There is an element of protectionism, but the issues aren't as straightforward as they might appear. Equally, there have to be concerns that the Eurex contract may not work properly – for example, when there is a credit event, such as a restructuring, there is no auction, so how can Eurex settle its contract then?"

The hedge fund manager is not as convinced. "Sure, the contract isn't perfect, but then the CDS contract wasn't either when we first began trading it. I realise Eurex hasn't done itself too many favours – I hear it didn't communicate fully to the dealers what it was going to do until the middle of last month, for example – but if we don't work together on this, it will never work," he comments.

If the dealers' objections do remain, it does not bode well for Eurex – or for Euronext.liffe, which is understood to be planning a product that will take the form of an 'OTC-type' contract and will settle through the exchange.

Of less concern to the market will be the Chicago-based initiatives in this area – CME's single name and index proposals, and options on CBOE are all expected to be based on fixed rates of recovery. CBOT is also planning a credit index product, but is yet to release any precise details on its format.

MP

Latest EPICs launched

New enhanced equity CLOs in the market

Details emerged last week of the latest deals to be sponsored by the Goldman Sachs Euro EPICs platform. As with other EPICs sponsored CLOs the ability to raise equity is enhanced through the use of a principal guarantee rated at double-A minus.

Goldman is currently in the market with three CLOs in which EPICs has participated. The latest is the €500m Malin CLO for Babson Capital Europe, which has seven rated tranches comprising three Triple As and junior pieces rated down to Ba3/BB-, all rated by Moody's and S&P. Equity accounts for a significant 10.75% of the deal that is expected to price by the end of the month.

The bank is also due with the Harbourmaster 9 CLO. The €770m deal offers seven tranches rated down from Triple A through to Double B. The two Triple A senior pieces are sized €245m and €269.5m and rated both by Fitch and S&P, with the latter tranche being a variable funding note. The A2 through to E classes are collectively sized at €186.34m and rated with Fitch only. Equity is 7.8% of the deal size.

Goldman is also expected to price the €600m CELF Loan Partners IV this week. The deal has been brought on behalf of CELF Investment Advisors, a unit of the Carlyle group.

Upon completion of these three deals EPICS will have invested in seven of the eight CLOs it targeted when the scheme was set up in May 2006 - the eighth deal is expected later this year. The programme is widely seen as being highly successful having invested in the vast majority of the top tier European CLO managers.

The aim of the programme is to enable Goldman Sachs to widen the investor base for the equity piece in the deals by providing the above-mentioned protection. The cost of that protection does reduce the return so it may not necessarily be as attractive to outright equity investors, but many are believed to have invested because of the regulatory and economic capital benefits.

The protection enables established CLO equity buyers to make increased allocation to CLOs because of the reduced risk limits associated with the double-A rating. Equally, those new to CLO equity investment will be attracted by the returns on offer believed to be in excess of three times those for normal double-A paper.

Although the protection is provided by Goldman Sachs, it is ZAIS Group Investment Advisors that is the servicer for the programme and bears full responsibility for the selection of managers along with ongoing surveillance and reporting on the programme.

MP

New DPIs on the way

Powerful model-dependent deals being prepped and imitators expected to follow

Structurers are putting together new versions of Dynamic Portfolio Insurance (DPI) trades to meet investor demand for more advanced total return products. The instruments are not for everyone, however.

As one dealer observes: "The models required have to be very powerful and the people putting them together need to be very smart. There are only a few firms that can offer fully flexible DPI at the moment, but as soon as one or two come out then inevitably everyone else will try to copy them."

RBS is already in the market with an actively managed principal-protected structure on behalf of Threadneedle Asset Management. Called Polestar DPI, the transaction allows the manager to follow a variety of strategies - including long/short trades - within certain risk parameters and is noteworthy for being non-index based.

Indeed, the reference portfolio comprises liquid global investment grade and non-investment grade credits that are selected by the manager based on its view of the entity's expected performance.

RBS is thought to have sold US$200m worth of S&P rated triple-A paper across four taps: two 7-year trades denominated in euros and sterling with a contingent coupon of 50bp over the benchmark; a single 10-year sterling-denominated trade with a coupon of 100bp over; and another undisclosed trade. Modelled returns vary between 200bp and 580bp over, depending on the tranche.

Dresdner Kleinwort is expected to come to the market next, but no details of its product are yet available.

The dealer says: "These deals will all be a smart evolution of current CPPI and CPDO technology, where the issuer talks to the investor first about what they want in connection with the characteristics and functions of the product - it's very much an investor-led trade, which will make it very popular."

But the real benchmark in this sector appears to be whether a structure achieves a rating and is then printed. Certainly the market seems to be taking care to fully understand the rating and mark-to-market sensitivities of these instruments.

While issuance of spread-based products will continue to be a theme in 2007, CPDOs and CPPIs are unlikely to become volume instruments. Around 50 spread-based trades are expected this year, only some of which will be CPDOs and CPPIs. By comparison, S&P rated over 700 synthetic CDOs in 2006.

MP

CPDOs for the masses?

Banks already promoting CPDOs to some retail investors, but caution is required

Strong demand for structured credit products from retail investors looking to diversify their portfolios has resulted in arranging banks heavily marketing complex products, such as CPDO and CPPI notes. However, this is currently only taking place in areas where there is a history of retail demand for structured credit.

Though retail is yet to be present in the Asian distribution of ABN AMRO's Surf CPDO products, Chris Hodgeman, the bank's Hong Kong-based head of structured credit marketing Asia excluding Japan/Korea, feels it is only a matter of time before this occurs. The fact that retail investors in Australia and New Zealand have bought CDOs and understand the instrument could prove a natural investor base, given the CPDO's high rating versus the coupon it can pay.

"Though it takes time to explain the mechanics of a CPDO, I'm sure it will happen. I can see no reason, if retail investors can understand a CDO, why they cannot understand a CPDO, it is a simpler, more transparent and liquid transaction," he says.

Eric Bertrand, head of fixed income and credit at CPR Asset management in Paris, believes CPDOs will appeal to his fund's private clients that have traditionally looked at equity-based products for high returns. "The evolution of structured credit products is creating demand from some customers who want to take the risk and look for returns in an asset class quite different from equity– the instrument is only a story of spread," he says.

Markets where the regulatory environment has allowed CDOs into the retail base, and perhaps where the first signs of CPDO uptake will occur, include Hong Kong, Singapore, Canada, Andorra, Benelux, in particular the Netherlands, and Switzerland, where some banks are already offering the product.

One Swiss wealth manager notes that Swiss private banks, such as UBS, have placed CDO tranches within their private client networks in Switzerland but this has been to a limited few. "You would assume the same would probably be true for CPDOs, there will be some placement but not on a large scale," he says.

Marc Pantic, director, structured credit team at Société Générale Corporate and Investment Banking in Paris concurs: "It is hard to tell whether the CPDO will find the same kind of appetite as CDOs."

Investors need to recognise the inherent risks of such instruments, as the high leverage in the structure means it is a very volatile product and subject to strong price and mark-to-market instability. "If you worry about volatility then stay away from CPDOs," warns CPR AM's Bertrand.

"One problem is the positive probability of a total loss and the amount of investor knowledge required to realise this fact. We regard it as a bit questionable to sell and offer this kind of unmanaged product to retail clients, which some investment banks are actually doing," adds Erik Larsson, head of research at AlphaSwiss Asset Management in Zurich. "I believe that managed CPDOs would better suit investors' needs and mitigate potential arbitrage issues."

Though CPDOs will probably find some interest in retail, SGCIB's Pantic argues, investment banks and distributors need to follow the right protocols for the product to succeed, given there is no capital protection and it is sold purely on the rating.

"They need to think hard how to sell to a retail client base [that is] able to understand and for whom such products are not inadequate. It is still early in the CPDO's life cycle and you do not want to kill its reputation by trying too soon to sell a product that not many can fully understand. It has to be done in a very cautious way, with the proper risk warnings and explanations and by really educating people," he says.

HD

Trading illiquids grows

Increasing buy-side demand for structured illiquid credit

Structured illiquid credit is becoming a burgeoning area for the investment community. Banks are ramping up their capabilities as demand grows from clients looking for financing solutions and alternative assets with enhanced yield.

The strength of structured illiquid credit trading (SICT) platforms is the ability to create tailored solutions for a broad range of assets, making it appropriate for a wide range of clients and business situations, argues Citigroup's Michael Jinn, head of SICT in London.

"By using derivatives technology, we can transform illiquid assets into more liquid instruments to more efficiently manage risk and to provide traditional credit investors with yield and risk that is not correlated to traditional assets," he says. Jinn adds that illiquid credit trading encompasses all assets for which visible pricing is not easily determinable, and thus origination and structuring opportunities can be applied to a broad asset base.

ABN Amro's Scott Eaton, global head of the principal trading group in London, explains that the flexibility of derivatives allows banks to create or bifurcate risk into the parts required to either keep, hedge or sell on.

"It is less about structuring a solution, in the traditional sense, say for an accounting or regulatory issue that a client has. It is more about creating a high margin product for end users, by applying your broad derivative knowledge and credit skills to as many assets as possible," he says.

The concept of illiquid credit has ventured into new territory in recent years notes Antonio di Flumeri, global head of illiquid credit at Deutsche Bank in London. "As the market has evolved and the customer base has become more sophisticated, the structured illiquid credit market has moved into new asset classes, such as receivables, project finance, mid-market lending, infrastructure and even into more equity-like investments such as toll roads, airports and renewable energy," he says.

Eaton adds that recent attention has surrounded slate finance for films and infrastructure, with activity evident in other asset types, such as longevity and mortality insurance products and intellectual property rights. And of late, CDO equity seems to have fallen into the illiquid space, on account of increased volatility causing spreads to widen. "You get a smattering of everything in illiquid credit, that is what makes it really fun," he says.

Project finance is currently a fruitful area for banks as transactions are usually rated, wrapped by monolines and in decent size. "You can tranche up the cashflows, wrap tranches and take exposure on the levered equity or shift it to, say a hedge fund," says Ross Taylor, head of illiquid credit trading and head of US private placement trading for Barclays Capital in New York.

Repackaging is another common financing alternative and Barclays Capital has included a total return swap on an illiquid asset and used a double-A credit as collateral within an SPV to issue notes into the market. This provides clients a blended return of double-A risk with an enhanced coupon from a riskier asset which is in derivatised, rather than cash, form.

Deutsche Bank's di Flumeri adds that many of the large funds are looking to invest in alternative assets to diversify away from their normal benchmarks. "The market is growing pretty rapidly and the difficult part still is sourcing enough assets to fulfil the demand from the buy-side," he says.

Despite increasing competition, Taylor believes banks do not necessarily have to look for worse credits to get the yield. "You have to be more creative and focus on high quality assets but you also need to sort through the documentation and structure to get the right risk you want," he says.

Taylor believes the US will continue to offer opportunities and forecasts Asia to witness greater activity in the coming years. "There is huge opportunity out there and it will be a region that will generally expand and one we will focus on a little more," he says.

HD

At the forefront

This week, Lou Lucido group managing director of the Credit Mortgage Group at TCW answers SCI's questions

Lou Lucido

From TCW's perspective, CDOs are strategically important as a means of gathering assets. We accomplish this by providing investors a means of capturing excess return in perceived inefficient markets. As such, we are constantly looking for opportunities to leverage our industry-leading platform of technology and personnel. Our goal in forming the Credit Mortgage Group was to establish a primary position within the structured credit market, which is something we have achieved – as we've managed to expand both in terms of size and recognition.

We see the structured credit market as continuing to be very important: it continues to evolve and is at the cutting edge in execution of the diverse risk/reward objectives of global investors. The market can quickly adapt not only to economic change, but also to different points of the credit cycle.

Q: In your view, what has been the most significant development in the credit markets in recent years?
A: The most significant development in the credit markets is the evolution of the derivatives market within structured credit: this has been very market-expansive and has broadened the range of participation from your more traditional accounts to the most complex investor types in the market.

The continued evolution of credit derivatives and synthetic instruments has allowed us to move from the more traditional CDO structures. More recent transactions focus on return differences or the expectation of pricing differences between or among other assets, such as commodities. For example, last year TCW launched Everest I – the first managed collateralised commodity obligation – through Barclays Capital.

Q: How has this affected your business?
A: The evolution of CDS instruments creates a different set of optionality and a different set of haves and have-nots among investors. The utility and information needed to manage the option component of that derivative (plus the various contract deliverables) requires possessing an appropriate combination of analytics and technology.

We've been at the forefront of this sector, having identified these opportunities early on, and we continue to view CDS as an opportunity to expand our platform. These instruments have allowed us to expand the number of strategies we can achieve within the market.

Q: What are your key areas of focus today?
A: Our platform enables us to identify and capture opportunities across the breath of the capital structure. Thus we're looking at opportunities across the whole spectrum of credit as well as geographies. Opportunities exist throughout the world.

One current focus of ours is non-Japan Asia, and the evolution of the markets and intra-markets within that region. A significant part of this is the need for, and continuing evolution of, regulation in terms of creditors' rights, debtors' rights and property rights throughout the region. We're starting to see progress being made in this area, which we believe will ultimately have a highly significant impact on the economic history of the 21st century.

Q: What is your strategy going forward?
A: Our strategy is to continue to be cutting-edge in terms of our ability to analyse and capture opportunities, regardless of what part of the world they exist in. The ability to access the necessary people and resources to achieve this on an ongoing basis is also very important. That is the difference between being what I call a 'short-term asset taker' and a durable business enterprise. So our strategy is what I call the 'enterprise approach' – to be as nimble as Sir Francis Drake and not like the Spanish Armada, if you will.

Q: What major developments do you need/expect from the market in the future?
A: The one thing that could potentially hinder the market is over-regulation. You're seeing an explosion of opportunities based on the ability of market participants to freely exchange ideas and generate global capital flows. So if the world were to become protectionist and those capital flows were impeded, that would certainly have a negative impact on the efficiency that is accruing in the market today.

Just look at China. Its internal development should be immensely facilitated by the global flow of capital as the country continues to develop. As the 21st century evolves, a large part of China's development will depend upon the nation's ability to source international capital and develop an internal 'intra-market' to help transform it from a savings society into an investment society.

About TCW
Los Angeles-based TCW is the largest CDO manager in the world, according to rankings compiled by Fitch and Standard & Poor's. TCW currently has US$150bn assets under management and roughly 25% of those assets have been raised through the issuance of CDOs.

RED secrets

In this week's Provider Profile, Sue Lord, vp, Markit Group talks about some lesser known aspects of her firm's Reference Entity Database

Markit RED (Reference Entity Database) is the market standard that confirms the legal relationship between reference entities that trade in the credit default swap market and their associated reference obligations, known as CLIPS. Each CLIP is created to identify both the entity and the pair.

CLIPS are widely used by dealers matching on DTCC and to identify trades in the trade warehouse. Markit has set up a 'preferred pair' for each reference entity that is widely traded and is based on DTCC volumes, credit indices and input from the RED user group. The preferred obligations list is used by 100% of the sell-side and 85% of the buy-side according to Markit's 2006 scorecard – the firm's annual review of market volumes, dealer and client operational models, technology, product control and risk management in the credit derivatives industry.

In terms of data volumes, RED has over 2,800 scrubbed reference entities and over 3,500 scrubbed CLIPs. RED is fully integrated into Bloomberg, Reuters, and all of the major credit brokers.

Sue Lord

Lord goes on to highlight five things that many may not know about Markit RED:

1. Scrubbing a reference entity involves reading hundreds of pages of documentation
Lord says: "I was completely unaware of the lengths that Markit, in partnership with Allen & Overy, goes to for scrubbing a reference entity. The jurisdictional documents which are sourced from more than 90 jurisdictions around the world are sometimes hundreds of pages long, especially if the entity has undergone a number of corporate events. It is an almost forensic process to determine a company's history, and the relationship to the debt it may have issued or guaranteed. RED scrubbing is certainly much more detailed than just reviewing a company's website or SEC filings."

2. RED maintains a central record of corporate events for the industry
"RED dramatically reduces the need to monitor for corporate events such as name changes, mergers, acquisitions or where debt transfer has occurred for entities which are in RED. Entity monitoring is extremely time consuming and costly, and is often a duplicated function across institutions. In addition to reducing the monitoring burden, RED also standardises corporate events implementation through the Corporate Events download which means that firms make the same changes in entity data at the same time. This is fundamentally important for the maintenance of records in the trade warehouse," Lord explains.

She continues: "This is linked to the Markit Successor product which enables full service RED clients to determine where a successor event has occurred. To do so involves obtaining factual information and legal interpretation of such facts within the provisions of each of the Definitions. The successor summary, as drafted by external law firms, is available to all RED subscribers from the Markit website and the full legal opinion can be obtained directly from the external law firm. Again, this eliminates duplication and helps firms to manage their risk."

3. RED data is not static
Far from static, Markit RED data is continuously updated, according to Lord. "I had assumed the scrubbing process was only conducted on request when an entity was added to RED, or following a corporate event. However, I've since learnt that Markit complete re-scrubs on all reference entities at least once a year and data such as the preferred reference obligations changes in response to research, client feedback, queries, DTCC, liquidity and corporate events," she says.

4. RED data is not just available from the Markit website
Markit RED data is available on Markit's website but can also be downloaded via XML to integrate into in-house trading, risk management, operational and reference data systems. Markit has an in-house client relationship team that assists in all aspects of the integration process and provides RED support. This aims to make RED easier to use as a standard reference data source throughout a firm.

"We also work very closely with numerous alliance partners and this is another area where Markit strives to provide excellent client service. RED has now been integrated into a number of leading credit platforms such as Calypso, Murex and FRONT ARENA," Lord adds.

5. RED covers loans as well as bonds
Lord says: "One thing that has really impressed me about both RED and Markit is the pace at which its products are developed and enhanced. I've already seen significant progress in just the two months since working with RED. We have launched RED Loans, which has been developed to support the growth in trading Loan CDS."

She goes on to explain that RED Loans confirms reference entities and the key identifying information for the credit agreements and loan facilities. RED Loans verifies and maintains the Syndicated Secured List for North America, the equivalent List of Deliverables for Europe as well as single name and index constituent data for the LevX and the soon-to-be-launched LCDX indices.

Consequently, Lord concludes: "I expect that RED Loans will be as integral to the market as RED Bonds."

About Markit
Markit Group is a provider of independent pricing, reference data, portfolio valuations and derivative processing to the global financial markets. Its clients include more than 900 sell-side and buy-side firms in over 30 countries, including commercial and investment banks, hedge funds, rating agencies, regulators, asset managers and insurance companies.

Deacon's seven-year itch

The latest company and people moves

Deacon's seven-year itch
John Deacon, in the ABS trading and investment group at Dillon Read Capital Management (formerly UBS Principal Finance), has left after seven years' service. He has no immediate plans though he is looking at other opportunities and has a number of ideas he is considering within his specialty areas of CMBS and CDOs.

Nair joins RBC, Kelly leaves
Priya Nair has left Citigroup to join RBC Capital Markets as global head of syndication, structured credit in London. Meanwhile, Stephen Kelly, head of credit flow trading at RBC CM, has left and is understood to be joining AIG.

Preston to trade LCDS at ABN
Alex Preston has left Gordian Knot to join ABN AMRO as a loan CDS trader. He reports to Stephen Lane and Haider Ali, co-heads of credit derivatives trading.

BofA loses Gonzalez
Raphael Gonzalez, senior ABS trader at Bank of America in New York, is understood to have left the US house to join JPMorgan in a similar role.

Johal in, Evans out at Commerzbank
Robin Evans, head of credit flow trading at Commerzbank, has left the bank and his destination is not known. A replacement for Evans is still to be announced. The bank has nonetheless hired Inga Johal into a new position of head of emerging markets trading, reporting to Eckhard Arndt, head of credit. Johal joins from Standard Bank London where he was global head of trading.

Radicopoulos to Lehman
Lehman Brothers is understood to have hired Billy Radicopoulos to head up the bank's cash CDO origination team. Radicopoulos was formerly director in the cash CDO team at Société Générale.

BGI hires Chadoha
Barclays Global Investors has hired Marie Chandoha as head of US fixed income in San Francisco, reporting to Peter Knez, cio, global head of fixed income. Chandoha joins from Wells Capital Management where she was co-head, senior portfolio manager of the Montgomery fixed-income division. She replaces former interim head, Brian Zalaznick, who now solely concentrates on his global head of fixed income structuring role, which includes oversight of the firm's CDO business.

Pinnavaia leaves GSAM
Nadja Pinnavaia, head of hedge fund strategies for Europe and Asia at Goldman Sachs Asset Management in London, is understood to be leaving to pursue other opportunities.

DBRS Strengthens EMEA Group
DBRS has appointed Niclas Sandstrom to its structured finance quantitative group in London. His appointment continues the growth of DBRS's EMEA team, which now numbers 20 people. Sandstrom will be focusing on structured credit products, where his involvement will range from quantitative research and C++ model development to rating support and client interaction. He will report to Norbert Jobst, svp, structured finance quantitative group in London.

Sandstrom joins DBRS from Credit Suisse, where he spent approximately two years as a quantitative analyst responsible for model validation across a wide range of credit derivative products. Prior to this, he was in a credit risk research role at ABN AMRO in Amsterdam.

Moravec joins ACA
Robert Moravec has joined ACA Capital as a vp, corporate credit, reporting to John Haltmaier, md, corporate credit. ACA Capital's corporate credit team supports the company's CDO asset management and structured credit businesses by analysing and managing the entire range of corporate credits, including leveraged loans and corporate credit default swaps.

Moravec comes to ACA Capital from ING Capital where he was a director handling banking relationships with media and telecommunications customers. Prior to ING, he was a vp in the restructuring advisory group at The Bank of Tokyo-Mitsubishi and a vp in the global telecommunications and media group at JPMorgan Chase.

Nicolle heads for Deutsche
Deutsche Bank has appointed Tim Nicolle as an md with responsibility for CEEMEA securitisation. He will join the bank in Q2 2007, reporting jointly to Jeff Stolz, head of the European securitised products group, and Sean Bates, head of emerging markets credit trading and structured finance.

In this newly-created role, Nicolle will be responsible for a team working across business lines to further develop Deutsche Bank's expertise in the CEEMEA region. He joins the bank from HVB where he was most recently deputy head of the European securitisation group responsible for the Central Eastern Europe and CIS regions.

SunGard joins forces with CMA
SunGard will provide an interface to CMA, the credit information specialist, via its FRONT ARENA trading platform. SunGard's FRONT ARENA customers are now able to upload pricing and reference data directly from CMA.

CMA DataVision is a same day, consensus-based price verification data service for CDS, indices and tranches sourced from 30 buy-side firms including the buy-side desks of leading global investment banks, hedge funds and asset managers.

"The combination of FRONT ARENA's trading technology and CMA's buy-side sourced data will help enhance the quality of customer operations across sales, trading, risk management and settlement of credit derivatives," says Laurent Paulhac, chief executive officer of CMA.

BoNY converts structured finance and CDOs
The Bank of New York has successfully completed the conversion of its structured finance and CDO business segments as part of its acquisition of JPMorgan Chase's corporate trust business. The conversion of the two business segments, which together process payments on average of more than US$20bn per month, involved nearly 20,000 client accounts with 60,000 securities and cash positions.

SG loses traders
Donal Golden and Frederica Pennati have both left the credit trading team at Société Générale Corporate and Investment Banking. Golden joins Morgan Stanley as junior analyst in commodities, while Pennati is understood to have joined Bank of America in a sales capacity.

HD & MP

LCDX edges closer

A round up of this week's structured credit news

LCDX edges closer
Dealers prepping the US loan CDS index – LCDX – are understood to be getting nearer to resolving the small number of outstanding technical issues that have prevented launch and pushed it past the most recently scheduled commencement date of 3 April (see SCI issue 30). Expectations are that the index will be launched before the end of this month, provided nothing unexpected arises.

Market participants are currently working on finalising precise information on two reference obligations in the index where credit agreements have not been publicly filed. Furthermore, there are some credits which will be referenced in LCDX that are not currently in the syndicated secured list. Both of these issues are likely to be resolved by the end of this week.

Provisional ratings assigned to another CDPC
Moody's has assigned a provisional triple-A counterparty rating to new CDPC Koch Financial Products (KFP), together with provisional ratings of A2 to the approximately US$100m subordinated notes and Baa2 to the approximately US$50m junior subordinated notes due 2037.

Organised as a Delaware limited liability company, KFP will initially invest in a diversified portfolio of investment grade rated obligations of corporate and sovereign credits through the credit default swap market. It is an indirect subsidiary of Koch Industries and will be managed by Principal Global Investors (a member of the Principal Financial Group).

Taiwan CLN on offer
M&G Investment Management has closed Oakham, its NT$1.6bn (US$50m) Aa3 rated synthetic CDO.

The Moody's rating addresses the expected loss posed to noteholders relative to the payment of a coupon equal to 3.75% and the redemption of principal by the legal final maturity. The scheduled maturity of the notes is in December 2016, but late credit events could delay the ultimate repayment of the notes.

The portfolio initially comprises 125 corporate entities, each representing 0.8% of exposure. The average rating on the pool is currently Baa1 with a WARF of 294 (inclusive of notched names).

While the notes are denominated in Taiwanese dollars, the amounts of interest and principal due are computed by reference to a fixed US dollar-denominated principal balance. The actual payments due will be the NT$ equivalent of these amounts computed in US$ converted at the spot rate of exchange on the day falling two Taipei business days prior to the date of payment.

Dual manager Cougar CLO II marketed
M&G Investment Management and Egret Capital are acting respectively as senior and junior portfolio managers on Cougar CLO II, a high yield transaction arranged by Societe Generale.

The deal comprises €124.3m Aaa Class A notes and €45m Baa3 Class B notes, both due in 2025. This portfolio is composed of European senior loans, second lien loans, mezzanine obligations and high yield bonds, and is expected to be 80% ramped-up at closing.

2005/6 vintage SF CDOs face sub-prime pressure
As US sub-prime market stresses continue to materialise, 2005 and 2006 vintage structured finance (SF) CDOs will be under increasing ratings pressure due to their substantially larger concentrations of such collateral, according to Fitch analysts in a new report. Ratings volatility arising from later vintage sub-prime RMBS will likely be experienced in 12 to 18 months as the actual loss experience becomes clearer.

"Though 2006 performance will be very poor, Fitch's more immediate concerns focus on near-term ratings volatility that will arise from earlier vintage sub-prime RMBS," says senior director Derek Miller. "Negative selection among borrowers due to prepayments is occurring simultaneously with the release of credit enhancement due to RMBS performance triggers passing, against the backdrop of a slowdown in the US housing market."

Mezzanine SF CDOs have the highest credit exposure to sub-prime RMBS through subordinate bonds and appear to be most vulnerable. More than 220 Fitch-rated high grade and mezzanine SF CDOs have exposure to the asset class, with US CDOs averaging 44.7% exposure (compared to 22.7% for European SF CDOs).

Approximately 3.2% of 2003 to 2006 vintage mezzanine SF CDO portfolios are comprised of below-investment grade sub-prime RMBS and 16% triple-B minus assets.

Three new credit events for synthetic CDOs
Only three new credit events were called on corporate obligors in the synthetic CDOs rated by S&P in Q406, thanks to the ongoing benign corporate credit environment.

"The quarterly global corporate default rate has remained close to all-time lows, although it continued its slight upward trajectory to 13.7bp during the fourth quarter of 2006 from 10.4bp during the third quarter," explains S&P credit analyst Andrew South.

Credit events were called on Dura Automotive Systems Inc, which was referenced in 34 CDOs, as well as Damovo Group SA and Autocam Corp – each of which was only referenced in a couple of transactions. S&P has seen the number of corporate obligors triggering CDO credit events in any single quarter continue at a modest level, consistent with the recent benign default rate in the broader corporate environment.

South adds: "In the fourth quarter of 2006, Damovo became the first European obligor to trigger a credit event since the fourth quarter of 2003. This brings the total number of credit events called on European entities through 2006 to only 16, affecting 218 synthetic CDO transactions rated by us."

TABX increases overlap in ABS CDOs
The inclusion of tranched ABX indices (TABX) in ABS CDO portfolios can sharply increase the overlap in collateral pools, Moody's says in a new report.

"Coupled with the current environment in which the new ABX-based tranches are trading at extremely wide spreads relative to similarly enhanced ABS CDO tranches, there is a risk that many ABS CDOs will see sharp increases in average pool-wide correlation through the purchase of the standardised ABX tranches in either synthetic or [CLN] form," explains Moody's md Eric Kolchinsky.

The first TABX indices began trading in February of this year. "The key to capturing the intra-CDO correlation is that any TABX exposure be properly identified. In general, collateral managers have wide discretion in classifying instruments that are incorporated into ABS CDO collateral pools, and TABX tranches might, for example, simply be classified by the name of the vehicle which issued the CLN," says Kolchinsky.

Moody's asks that managers of CDOs and other rated vehicles that wish to offer protection on the TABX, either through a CLN or swap, first discuss its appropriate treatment within the CDO with the rating agency.

Addressing inter-CDO correlation, however, is more difficult. When an ABS CDO contains both ABS-related positions as well as tranches of other actively managed CDOs, it is difficult to perform a look-through analysis on an ongoing basis because of the dynamic nature of each underlying CDO's portfolio.

Moody's is currently undergoing a research project to study the overlaps in ABS CDOs and will adjust its ABS CDO correlations accordingly. Until the research project is completed, Moody's may consider look-through correlations for ABS CDOs in the initial rating process.

LGD roll-out in EMEA
Moody's has implemented its loss-given-default (LGD) rating methodology in EMEA, following its roll-out in the US and Canada last year. The agency's EMEA ratings universe includes roughly 600 corporate families, with the LGD methodology being applied to 200 high yield issuers. 22% of these companies were affected in terms of ratings changes.

All ratings actions to first lien loans (around 40% of those publicly rated) were 1-2 notch upgrades; the average assigned LGD rating was 37% (63% recovery rate). Second lien rating actions were skewed towards downgrades (70%) versus upgrades (30%); the average LGD estimate was 71% (29% recovery rate).

The implications for CLOs are broadly similar to those for US CLOs, including potentially tighter loan spreads and decreased subordination levels for senior CLO debt, says analysts at JP Morgan. However, loan spreads have typically been more "sticky" in Europe and less reactive to the smaller (but growing) European CLO bid (US loan spreads actually widened during the period in which LGD ratings were introduced).

Rating changes were also more limited in EMEA (67% of US first lien loans saw upgrades), although the majority of high yield loans in Europe are shadow-rated, making it difficult to gauge the ultimate impact.

Revised JDA methodology released
Moody's has published its revised joint-default analysis (JDA) methodology for banks, limiting the degree of support to a notch or two and resulting in those banks already 'done' now having to face a further review.

According to analysts at RBS, it appears that the US changes are unlikely to be reversed but that many of the European bank ratings will need to be reviewed. Changes here are expected to be downgrades of a notch or two with three notches in some cases (most likely the Icelandic and Hungarian banks).

The ratings methodology looks broadly similar but the black box has been tweaked so that it produces lower final ratings uplifts with far less double counting of support. Additionally, rating analysts will have more discretion regarding the final rating as opposed to being dictated to by the model.

Moody's has also 'simplified' its notching approach with one notch now for subordinated and 'equivalent hybrid capital instruments', two notches for preferred stock and equivalents, and one or two notches for hybrids with meaningful mandatory deferral triggers.

New methodology for CRE mezzanine debt
Moody's has released a report outlining its approach to rating mezzanine debt in response to strong growth in the use of such loans to finance commercial real estate (CRE) assets. Over the last two years, mezzanine loan issuance within CRE CDOs has climbed rapidly, reaching over US$3.2bn last year from approximately US$25m in 2004.

CRE mezzanine loans are backed only by a security interest in the shares or partnership interests of a real property owner, not by security in the real estate itself, as is provided by a traditional mortgage. Daniel Rubock, a Moody's analyst and author of the report, notes: "Effectively, mezzanine debt merely enables the lender to step into the shoes of the mezzanine borrower. Because of that fact it's a weaker form of collateral."

"The mezzanine lender's position after foreclosure is subject to whatever a borrower in its wisdom or foolishness – or, perhaps, disregard of promises to the mezzanine lender – may have done to the real estate asset. Subordinate debt, contract claims of service providers, claims of tenants, judgment creditors, mechanics' liens, federal and state tax liens, all will trump the interests of the mezzanine lender. The borrower could even sell the underlying real asset from under the mezzanine lender and misapply the proceeds, or make changes to organisational documents," he adds.

Mezzanine loans, however, are a weaker form of collateral than other subordinate debt, such as B-notes, and so have less of a negative credit ratings effect on more senior debt. This reduced penalty actually provides lenders with an added incentive to cast additional leverage as mezzanine debt, Rubock says, explaining the recent growth.

Overall, the substance of a mezzanine loan agreement should be comparable to that of a CRE mortgage loan agreement, with most of the same terms, conditions, covenants, representations and warranties – altered, of course, to reflect the nature of collateral – as those obtained by mortgage lenders.

Among the factors that strengthen mezzanine debt is a loan maturity that is coterminous with the maturity date of the senior loan. "Senior loan term default risk is reduced when the sponsor need not forage for mezzanine financing during the term. This convention benefits the mezzanine lender as well. The balloon date of the senior loan is a natural 'break point' when sponsors will be embarking on an all-out effort to restack the debt of its asset," the report says.

Quantifi adds support for TABX
Quantifi Solutions has extended the functionality of its credit derivatives valuation software to include the ability to price correlation products on asset-backed securities (ABS), such as tranches on the ABX index (TABX).

Commonly, asset-backed security analysis is scenario-based, which does not capture correlation risk. Quantifi's new tools for valuing TABX – tranches on baskets of ABCDS – build upon existing modelling tools for synthetic CDOs on corporate credits by adding the ability to model prepayments.

"We have experienced increasing demand for credit derivative models applied to alternate asset classes such as ABS. We have responded by working closely with clients who are active in this area to develop pricing models which bridge the gap between traditional credit correlation models and deterministic cashflow analysis," says Rohan Douglas, ceo and founder of Quantifi.

Lewtan revamps ABS product
Lewtan Technologies has released a new version of its ABSNet European Cash Flows product. The new version features a completely revamped interface that allows users to directly navigate between cashflows, pricing analytics, waterfall views and cashflow graphs. The system also enables users to model delinquencies, forecast excess spread rates and solve for first loss.

"Beyond the fundamental need for timely and accurate cashflows, recent instability in the US sub-prime market, as well as concerns over reserve fund draws in some UK non-conforming RMBS transactions have required investors to be more rigorous in their analytics," says Usman Ismail, evp, business development for Lewtan and its European ABSNet operations.

The ABSNet European Cash Flows library contains securities backed by RMBS and ABS, as well as CLO transactions from across all regions of Western and Central Europe. In addition, ABSNet European Cash Flows actively models pre-issuance transactions as they come to market.

Credit risk in iTraxx Europe stable
Fitch Ratings says credit risk in the iTraxx Europe Series 7 CDS index is stable following the recent roll-over from Series 6, according to its analysis using Vector version 3.1. The agency has provided credit assessments for each of the three-, five-, seven- and 10-year index maturities.

The credit risk of the iTraxx Europe Series 7 index is broadly similar to that of the Series 6 index, as the weighted average rating has only slightly improved to 2.87 (A-/BBB+) from 2.89 (A-/BBB+). Furthermore, there has been a moderate decrease of the triple-B concentration in favour of an increase of the triple-B plus concentration.

The top three industry concentrations in the iTraxx Europe Series 7 index are: banking & finance (20%), utilities (15.2%) and telecommunications (8.8%). This is similar to the Series 6 top three industry concentrations of: banking & finance (20%), utilities (15.2%) and telecommunications (9.6%).

Additionally, the number of reference entities on rating watch negative has increased to eight from seven. However, all 125 reference entities in the portfolio are rated investment-grade, as was the case in Series 6.

There have been six reference entities deleted and another six added to reflect recent dealer liquidity polls. Those excluded are: BAE Systems Plc, Banca Intesa Spa, ITV Plc, Nokia Oyj, Rentokil Initial Plc and Sanpaolo Imi Spa. Those included are: BNP Paribas, Hanson Plc, Intesa Sanpaolo Spa, Publicis Groupe SA, STMicroelectronics NV and Vinci.

MP

Trading ideas - rounding the basis

Dave Klein, research analyst at Credit Derivatives Research, looks at a negative basis trade on Comcast Cable Communications

The new baseball season is upon us and we look at the positive impact of a triple play in this trade. It is a negative basis trade on the Comcast Cable Communications (CMCSA).

Basis trades are often seen as the bread and butter trades of many credit traders. The systemic rise and fall of credit quality often exhibits itself quite differently in each of the cash and synthetic credit markets.

The basis, or cash-CDS differential, tends to move on the back of a number of technical and fundamental factors. The most notable, over the past few months, are the impact of the structured credit technical bid (driving supply for CDS protection) and loan issuance and its hedging (driving demand for CDS protection). Neither of these major forces impacts the bond market directly – but clearly there is an arbitrage-based relationship between the two that needs to be kept in line.

Based on our survival-based valuation approach, the CMCSA's 8.375's of Mar 2013 bond is about US$0.45 cheap to fair value. Exhibit 1 indicates the 'price-based' term structure of CMCSA and indicates that CMCSA's bonds are trading both rich and cheap to fair value.

Exhibit 1

CMCSA is active in the credit derivative markets and has liquid cash bonds. We note that the 7.875's of Aug 2013 are even cheaper to fair value but we do not see much liquidity in these bonds. Also, the 8.375's of 2013 are AT&T Broadband bonds, so make sure they can be used as reference obligations for the CMCSA CDS.

Based on our analysis of bond cheapness and market activity, the 8.375's of March 2013 is viable for the long bond leg of our negative basis trade. We must now look at the actual spreads to judge whether we are actually trading at a negative basis, and, maybe more importantly, can position ourselves with positive carry.

Comparing the bond z-spreads (for the active bonds) with the CDS term structure, Exhibit 2 shows that the bond is indeed trading wide of CDS. Importantly, we must note that the bond is trading wide of its interpolated maturity-equivalent CDS (five year) which reflects our second basis adjustment discussed above.

Exhibit 2

The CMCSA CDS curve is 'well-behaved' and has no serious inflexion points. There is also reasonable liquidity in the five-year on-the-run maturity. Additionally, we see solid two-way pricing on Bloomberg's ALLQ screens for the 8.375's of March 2013.

Given that we have identified the bond as trading cheap to the CDS market (from our survival-based framework) and its z-spread as being wide of on- and off-the-run CDS levels, we must ensure that we account correctly for any premium or discount at which the bond is trading.

As seen in Exhibit 3, the basis between five-year CDS and the Mar 2013 bond has been negative over the past year. This is not surprising as the bond now is a 6 year bond and we'd expect the on-the-run 5Y CDS to be lower.

Exhibit 3

Additionally, we see the basis tighten as the on-the-run CDS maturity comes closer to the bond maturity. However, we've see the basis widen out over the past month as the bonds sold off but the CDS remained flat. This is the trade opportunity. Either the bonds should rally or the CDS should sell off.

We must adjust for the impact of loss given default differences between the bond and CDS market. This maximum 'gearing' effect is translated into our adjusted basis and carry calculations. At current levels, the package has a raw basis of -15.5bp, and a positive adjusted carry of 9.5bp.

Over the hedge
There are two significant risks that need to be hedged in a bond-CDS negative basis trade. The first is default, which can be accounted for primitively in the adjustments we suggested previously to the CDS leg notional amount. In a perfect world, we would suggest frequent re-hedging of the CDS leg to account for changes in the bond price, but this is impractical in reality.

The approach most frequently used by practitioners is to hedge based on the price of the bond. A bond trading at US$110 would mean we buy 1.1 times the notional protection as we bought face value of the bond. A bond trading at US$90 would mean we buy 0.9 times the notional protection as we bought face value of the bond. This approximation is, somewhat surprisingly, close to optimal in terms of a single CDS static hedge.

This default risk hedge amount – based broadly on the bond price change – is important to understand in that if the bond is trading a premium (over par) then we will be over-hedged in the CDS as the bond pulls 'down' to par over time. Correspondingly, if the bond trades at a discount (under par) then we will be under-hedged as the bond pulls 'up' to par as maturity approaches.

We have seen different approaches discussed as to how to solve this dilemma but we prefer to 'keep it simple'. A practical approach is to hedge the bond's default risk with the most liquid (and closest in maturity) CDS according to the average of current and final bond price adjustments. Our initial hedge amount should be based on a minimisation of expected loss in default – we calculate the initial hedge as (Bond Price – Recovery)/(Par – Recovery).

For a bond trading at US$110 and assuming a 40% recovery, the initial hedge amount should (110-40)/(100-40)=117%. We should buy US$11.7m protection for each US$10m of face value bond we buy.

This hedge will, obviously, be over-hedged as the bond pulls to par at maturity. We would want to hold a 100% weighting in the CDS as we get close to maturity. So we simply average our initial and final hedge amounts – (117-100)/2= 108.5% - to arrive at our 'simple' initial hedge. We therefore buy US$10.85m protection for each US$10m of bond face value we buy. This hedge is, on 'average' our most optimal hedge.

We have a slightly more directional perspective on this hedge. Given that we are basically hedging the impact of default on our position, if we felt strongly that the credit was unlikely to default, then we would prefer to receive more carry for more default risk. Vice versa, if we felt that fundamentals were weakening and the credit was more likely to default, then we might prefer to be slightly over-hedged.

Utilising Gimme Credit's Credit Scores – which reflect the fundamental outlook for the issuer, we adjust our single CDS hedge. If the outlook is improving then we will prefer to hedge only 100% of face value to maturity. If the outlook is deteriorating then we would hedge at our maximum current hedge amount (117% in our example). If the outlook is stable then we will choose our mid-point optimal hedge (108.5% in our example).

Once this hedge is put on, we will monitor bond price levels and default risks to ensure that our hedge is still 'close' to default neutral. This is more reasonable than adjusting frequently and paying the bid-offers, and even more importantly can often provide more carry in the short-term on a credit that is a low default risk.

In our specific trade today, the bond is trading at US$114.77 (best ask) and so our minimum hedge would be (114.77 – 40)/(100-40) = 125%. Given our improving fundamental outlook for CMCSA, the optimal hedge would be 100%. Given our improving fundamental outlook for CMCSA, we will choose the optimal (100%) hedge rather than the geared, 125% hedge.

Adding in mid-dated CDS to balance the hedge is possible and we are happy to discuss the use of a second CDS position with any investors who prefer to be more 'perfectly' hedged. We suggest the single CDS to bond 100% hedge and a less frequent but vigilant re-hedging program. We can generate a forward-based price projection for the bond based on the CDS curve – to show how we expect the bond price to drop (premium) or rise (discount) until maturity – which may help some investors with their hedging strategies.

The second (and often overlooked) hedge is the simple interest rate hedge on the bond. Our basis trade is positioned to benefit from any convergence of the credit risk perspectives of the cash and CDS markets and further, the bond is cheap on the basis of its CDS curve (only credit-risk based).

We therefore must ensure that our bond is hedged against interest rate movements and the impact these will have on the price of the cash instrument. Note that the CDS is exposed to interest rate movements but only in the discounting of cashflows and this interest rate sensitivity is minimal (and we ignore it in this case).

Investors could choose to asset swap the bond to minimise the interest rate sensitivity but we suggest otherwise. The asset swap has a number of shortcomings (not the least of which are lack of liquidity, premium/discount bond price errors, and default cash flow timing mismatches). We suggest buying the bond outright – benefiting from the most positive carry – and hedging interest rate risk on a portfolio basis.

We assume that many investors will not be carrying a single bond exposure and therefore it is more efficient to manage overall interest rate risks in a portfolio context. Also, assuming that investors will be over-, or under-weight issuers against their bogeys (in the traditional fixed income shops), this portfolio-based interest rate risk management allows for a more direct allocation of funds that reflects the interest rate 'view' of the manager.

Given the cheapness of CMCSA's bonds, relatively wide basis and slightly positive carry of our overall position, we suggest this negative basis trade (long bond and long protection) as a default-neutral way to pick up 15bp and more importantly potentially realise the bond's relative value differential.

Risk analysis
This position is a bit away from default-neutrality but close to spread duration-neutral. There is a slight maturity mismatch since the bond matures in a bit less than six years. This does not concern us as we expect convergence long before our CDS position matures.

We do, notably, understand that many investors would still prefer to understand the interest rate risks associated with this position. Exhibit 4 shows the overall and key-rate sensitivities for the bond that can be used to specifically hedge any residual interest rate risk and offers the investor some more insights into the price sensitivities of the position.

Exhibit 4

The trade has reasonable positive carry – given the current levels. This carry cushion protects the investor from any short-term mark-to-market losses.

Entering and exiting any trade in these maturities carries execution risk, but this is not a major risk with CMCSA CDS in this maturity as it is increasingly liquid. Our largest concern is execution in size in the bond markets.

Liquidity
Liquidity is a major driver of any longer-dated trade – i.e. the ability to transact effectively across the bid-offer spread in the bond and CDS markets. Our data on liquidity, created from the volume of bids, offers, and trades we see each day, provide us with significant comfort in both the ability to enter a trade in CMCSA and the bid-offer spread costs.

CMCSA shows reasonable liquidity in the five-year maturity and bid-offer spreads are narrowing to around 3-4bp.

Recent bids and offers (seen on Bloomberg's ALLQ) for the March 2013 CMCSA bonds have shown good availability in both directions. We recommend the bond leg of the basis be worked first, looking for a price below US$115.25 (our model fair-value).

Fundamentals
While this trade is technical in nature and not necessarily impacted by fundamentals, we must confirm there are no surprises in the short-term that could cause divergence between cash and CDS markets such as LBOs or major M&A activity. Generally, our negative basis trades are based on the assumption that the bond market is mispriced relative to the CDS curve, rather than an expectation of general curve movements.

Dave Novosel, Gimme Credit's Cable expert, maintains an improving fundamental outlook for CMCSA. CMCSA had a great fourth quarter last year and Dave believes the company will do well revenue-wise in 2007 given its ability to capture subscribers. CMCSA has increasing margins and excellent free cash flow and maintains a lead over competitors in its ability to bundle services (cable, Internet, telephony) and hold onto subscribers.

Summary and trade recommendation
CMCSA has been able to successfully bundle its services (cable, Internet & telephone) to attract and keep profitable subscribers. While both CDS and cash spreads have tightened over the past year, we find a disconnect between CMCSA's bond and CDS levels. For this trade, the traditional z-spread-to-CDS raw basis is negative and our 'curve and bond price'-adjusted basis remains negative and shows positive carry.

We feel a default-neutral negative basis trade is an excellent opportunity to earn modest carry while waiting for the bonds to converge to fair value. We recommend an optimally-hedged (based on our improving fundamental outlook) basis package using a single CDS static hedge to pick up 15bp of carry.

Buy US$1m notional Comcast Cable Communications 5 Year CDS protection at 25bp and

Buy US$1m notional (US$1.148m cost) Comcast Cable Communications (AT&T Broadband) 8.375% of March 2013 bonds at a price of US$114.77 (z-spread of 40bp) to gain 15bp of positive carry.

For more information and regular updates on this trade idea go to: www.creditresearch.com

Copyright © 2007 Credit Derivatives Research LLC. All Rights Reserved.

Note: This article is intended for general information and use and does not constitute trading advice from Structured Credit Investor (see also terms and conditions, below, section 12).