Traders pile into credit-default swaps

  • Business
  • Friday, 08 Jul 2016

LONDON: Traders are buying and selling more credit protection on UK companies after Britain's vote to exit the European Union.

The volume of credit-default swaps changing hands in the week through July 1 surged, compared with the week of the June 23 referendum, according to data from Depository Trust & Clearing Corp.

Trades covered almost seven times as much debt of fashion retailer Next Plc as the week before, while those on Marks & Spencer Group Plc rose threefold and contracts on bank bonds also climbed.

Investors are building positions to insure against losses on British banks and retailers amid concern that the vote to leave the 28-nation bloc will send the economy into recession.

UK property funds with more than £15bil of assets froze withdrawals as investors sought to dump real estate holdings and the pound plunged to a 31-year low this week.

“Swaps on UK companies aren’t normally a busy segment for trading,” said Michael Hampden-Turner, a default swaps specialist on the credit trading desk at HSBC Holdings Plc in London.

“A lot of people want to hedge exposures or shift from old strategies into new ones. They’re looking at sectors that would come under particular stress in a prolonged Brexit scenario and that's retailers and the banks with the most UK exposure.”

Credit-default swaps covering a gross US$202mil of Next's bonds traded in the week through July 1, compared with US$29mil the week before, according to DTCC data.

Contracts insuring Marks & Spencer Group Plc's debt rose to US$242mil, while those on Barclays Plc climbed 50% to US$590mil and swaps on Royal Bank of Scotland Group Plc rose 87% to US$331mil, the data show.

The cost of insuring UK corporate debt rose along with trading volumes, according to data compiled by Bloomberg.

Credit-default swaps on Next rose to an almost four-year high of 128 basis points on Thursday, while those on Marks & Spencer climbed to a three-year high of 188 basis points.

Barclays and RBS reached the highest levels since 2013 this week.

Trades covered US$331mil of debt sold by Rolls-Royce Holdings Plc, the UK’s biggest manufacturer, more than six times the previous week's volume, DTCC data show.

The company has said the country's decision to leave the EU will have no immediate effect on its business.

“Around episodic events like Brexit, credit-default swaps can become more liquid with lots of people expressing views,” said Simon Colvin, a London-based research analyst at Markit Ltd.

“We can see that in the pick-up in volumes.” – Bloomberg

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