ABX to restructure indices in light of credit crunch
ABX plans to restructure indices in light of credit crunch
Several credit-derivative indices tied to bonds backed by subprime mortgages will be restructured. The move comes with the anticipated drop-off in the issuance of the bonds in light of the current credit-market crisis. The four ABX derivative indices may change their criteria because securitizations have fallen so low.
Sub-prime bond drought to force index change
Lianna Brinded
17 Oct 2007
A series of credit derivative indices tied to bonds backed by sub-prime mortgages will have to be restructured because issuance of the bonds is expected to fall sharply as a result of the credit crisis.
The four ABX derivative indices, which track the cost or spread of credit derivatives on 20 bonds secured by sub-prime mortgages and home-equity loans, are struggling to replace maturing bonds with newly qualified issues because supply has been severely hit by the sub-prime mortgage crisis in the US.
New versions of the indices are created every six months as some of the securities mature and fall out of the index, leaving room for newly issued asset-backed securities to qualify. However, the dearth of new supply in the past three months and poor outlook to the end of the year may lead the indexes being changed.
Ben Logan, managing director for product development at New York-based Markit Group, an independent source for credit derivative pricing, said: “The ABX indexes may need to change their criteria because securitizations have fallen so low, so there may not be enough bonds to fill the series."
ABX credit derivative contracts, or credit default swaps, are commonly used by bond investors to speculate on or hedge against the risk of the underlying security it references not being repaid as expected. The indexes were created last year to reference asset-backed bonds, the lowest quality of which are narrowly rated as investment grade, at BBB-.
The cost of buying protection on a BBB- rated bonds through the index has plunged about 73% to 26.81 cents in the dollar since it started trading in January this year because of a unexpected sharp rise in US sub-prime mortgage loan delinquencies, which in turn provoked the wider credit turmoil that ensued.
Home loans to borrowers with patchy credit histories have fallen sharply since the crisis first emerged earlier this year as lenders have begun to tighten standards, leading to steep decline in the volume of the loans being securitized by banks and sold on to the capital markets as bonds.
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posted by Victor Lloyd Smith @ 11:11 AM
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