Dealers buy and sell bonds of the defaulting companies during the auction in order to set one price by which holders of the derivatives settle. Sellers of the contracts, which are used to hedge against losses or speculate on creditworthiness, pay the buyer face value, less the value of the underlying bonds.
The settlement will be the largest for the market since last year’s collapse of Lehman Brothers Holdings Inc.
Banks, hedge funds, insurance companies and other investors had bought or sold a net $2.31 billion of default protection on the automaker’s debt as of May 27, according to data from the Depository Trust & Clearing Corp., which runs a central registry that captures most trades. Another $776 million was bought through contracts on indexes that include GM, the largest U.S. automaker, among groups of companies, New York-based Depository Trust’s data show.
Wow, imagine that....banks, hedge funds and insurance companies buy default protection which pays them full value of their bonds IF AND ONLY IF THERE IS A DEFAULT ON THE BONDS WHICH OCCURS WITH A BANKRUPTCY FILING! IF my math is correct..$2,310,000,000 + $776,000,000 = $3,086,000,000. OK have to use a calculator for this one......$3,086,000,000 (total CDS)/27,200,000,0000 (total bonds)=11.3%. Hummmm.....The original tender offer for the bonds had a mandatory 90% tender rate. Well with 11.3% getting paid in full how could they have ever gotten 90%, even if the terms were fair?
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auMORpVwbZus
Stay tuned lets see what value the market makers place on GM bonds at the CDS Auction June 12.
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