Market tests are useful as they best indicate just what is the real value of hundreds of billions of distressed securities stripped away from any unwarranted optimism and green shoot propaganda. Today's Visteon CDS Auction was just one such test. And if there was a way to grade the test, it would be an emphatic F: not so much for bankrupt Visteon which is already in the morgue, but for other comparable auto suppliers whose bonds and loans recently have seen overambitious PMs buying their debt as if every single credit instrument would be rolled into Taxpayer Capital LLC's Worthless Assets Fund. (One need only look at the stock price of LEA over the past 2 weeks to see the insanity going on with autosuppliers).
The final result: a jaw dropping 3 cent recovery on the Visteon CDS and 39 on the loans. I recently presented other auction clearing prices, which averaged about 10 for unsecured tranches. It is not surprising to see that the average price continues dropping aggressively: and this despite all the green shoots that the economy is experiencing, and despite Larry Kudlow's expectation for the recession ending in about a month.
Aside from the philosophical implications that the entire auto supply chain industry is basically insolvent if it were to be valued fairly, it is worth nothing that in this particular auction, it was Bank of America which almost single handedly took home the spoils, getting hit on $91 million worth of limit order at 3.375%: half the net open interest to sell of $180 million. Whether this was to cover prop exposure, or for clients, is unknown. However what is most amusing is Deutsche Bank's substantial interest... at 0.5 cents on the dollar.
For full details on the Visteon CDS auction, click here.
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