Sri Lanka credit-default swaps start trading after bond sale

Chief Regulatory Officer at CSE Renuke Wijayawardhane presenting the listing certificate to Executive Chairperson at Renuka Hotels Shibani Thambiayah

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.