Puzzled by succession

A dramatic upturn in corporate activity has brought some uncertainty into the credit default swaps market. Dealers and their clients are getting their heads around how corporate activity can affect their positions. By Rachel Wolcott

Dealers and investors could once be relatively sure how credit default swap (CDS) spreads would behave if the underlying credit were the subject of a leveraged buy-out (LBO) or even just an LBO rumour. Most of the time, spreads would blow out on the expectation that the target credit would be leveraged to the hilt and subsequently downgraded, to the detriment of its bondholders.

That convention has now all but vanished, as corporate financiers have come up with a host of new strategies to help