Sri Lanka credit-default swaps start trading after bond sale

Oct 18, 2007 (LBO) –Credit-default swaps tied to Sri Lanka’s debt started trading Thursday after the government sold 500 million dollars in bonds to foreign investors for the first time, Bloomberg newswire reported. Five-year contracts used to speculate on the South Asian nation’s ability to repay debt were quoted at 375 basis points as of 9:20 a.m. in Singapore, according to prices from JPMorgan Chase & Co.

The price to protect a 10 million dollar investment in the notes from default is equivalent to 375,000 dollars.

The cost is about a percentage point more than for similarly rated Pakistan.

Credit-default swaps tied to the Islamic republic’s foreign debt rose 4 basis points to 273 basis points yesterday, according to prices from London-based CMA Datavision.

The debt of both nations carries the high-risk, high-yield credit ranking of B+ from Standard & Poor’s, four levels below investment grade.

The Sri Lankan government sold its 8.25 percent notes due in October, 2012 at a yield 397.2 basis points higher than U.S. Treasuries of similar maturity yesterday, according to Bloomberg data.

UBS AG quoted the notes at an 8.25 percent yield today.

Credit-default swaps, financial instruments based on bonds
or loans, were conceived to protect bondholders by paying the
buyer face value in exchange for the underlying securities
should the borrower default.

A decrease in the price indicates improving investor perceptions of credit quality and an increase suggests deterioration.

Contracts on the iTraxx Asia Ex-Japan High Yield Series 8 Index of 20 borrowers, including the Indonesian government and India’s Tata Motors Ltd., rose 4 basis points to 224 basis points, according to JPMorgan prices.

The broader iTraxx Asia Ex-Japan Series 8 Index of 70 issuers rose 1 basis point to 88.5
basis points.

The indexes are benchmarks for protecting bonds against default.

Traders use them to speculate on changes in credit quality. A basis point, or 0.01 percentage point, is worth 1,000 dollars on a swap that protects 10 million dollars of debt from default.