Tuesday, February 10, 2009

Nortel ISDA CDS Auction Presents 15% One Day Return; Is UBS In Serious Trouble?

As we wrote extensively two weeks ago when discussed the ISDA CDS dutch settlement auction, we came to the conclusion that it presents a terrific one-time arbitrage opportunity due to the fundamentals-to-liquidity disconnect in the valuation of a given defaulted security (much more in linked article). Today the Nortel ISDA auction was completed and at first glance is generating a 15% one day returns for any accounts that got involved, as the bond complex is bid 14 post the auction (and closed at 14 yesterday as well), after the ISDA auction had a final clearing price of 12, for a virtually risk free pick up of 2 points or 15%. For anyone who picked up some bonds, nice annualized 5475% return.

Some details from Creditex:

Final clearing price: 12.00
Weighted average limit price based on indicated notional and levels: 8.56
Sell limit orders total notional: $290.47 million
Total broker expressed bid notional interest: $2.1 billion
Bid Interest to Sell order ratio: 13.9%
Brokers expressing notional interest and limits (sorted by proposed limit price):
  • Bank of America: $135 @ 11.62
  • Barclays: $140 @ 11.47
  • Morgan Stanley: $314 @ 10.89
  • RBS: $75 @ 10.03
  • BNP Paribas: $13.5 @ 9.83
  • Goldman Sachs: $311 @ 9.68
  • JP Morgan: $265 @ 9.42
  • Credit Suisse: $215 @ 8.24
  • Deutsche Bank: $295 @ 6.45
  • UBS: $326.9 @ 3.78
Some very curious results: in the Lehman auction we noticed that Morgan Stanley was providing many straw man limit bids, all of which did not get hit. The Nortel auction presents that the trading desks of UBS with their $326 million of notional bid and Deutsche Bank at $295 (as well as Credit Suisse to an extent with $215 million) may be in substantial trouble (or just have no viable hedge fund accounts left), as the weighted average bid for UBS was 3.78, while for Deutsche Bank was 6.45. No doubt these trading desks were aware there is no chance in hell these bids would be hit, so they were merely presented for posturing with the notional amount presented, knowing full well they would not have to allocate the capital. Which leads one to believe that they simply do not have the capital available!

As we had mentioned before, ISDA auctions are a terrific way to glean real insight into the true inner workings of assorted trading desks, and the Nortel auction definitely did not disappoint. Sphere: Related Content
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jck said...

you are assuming that the bids are for the dealers' own accounts, this is not necessarily so, part 2 of the auction process is for dealers AND investors.

Tyler Durden said...

correct, which is why i added the part about no viable hedge fund accounts left. but any trading desk would be willing to risk 10-20 million of capital to get hit at a reasonable price. for ubs to presume that a bond trading at 14 would hit a 5 cent limit is plain silly

Anonymous said...

I don't get the leap of logic from the expectation (even certainty) that they wouldn't get hit on the low bids to UBS not having the capital. Also your response to jck is nonsense: jck's point is that the low bids may have been put in on behalf of customers - you take that as evidence that they have no viable hedge fund accounts left. How so?

Tyler Durden said...

trading desks are all too aware of the free money isda auctions provide, and as nortel, lehman, lyondell et al indicated a 15-25% discount to close to get hit is reasonable. anything much lower than that indicates one of two things:
1) the desk itself can not allocate 50-100mm capital at realistic clearing prices to pick up the 1-2 pts.
2) the salesmen were unable to pitch the trade to even their best accounts to present workable bids.

either way, it is merely posturing to show to other auction participants that the broker/dealer is still "alive in active."

the low ball bids very well may have been on behalf of clients which i did aknowledge in the post, hell if i was a qib i would put in a billion bid at 1 myself.

regardless, if the big bid at 3ish by UBS was for an account, it is an even worse indicator of the "flip" capital available for principal investing.

Anonymous said...

Spot on Tyler, agree entirely. This is free freaking money!
Great site, keep it up.

Anonymous said...

It could be that UBS is genuinely not interested in picking up these deals. Their fixed income desks are getting culled, so they may have other things on their mind.