Behind the Credit Markets
Overall, the CDX index of investment-grade debt currently trades at 107 basis points, which means it costs $107,000 to insure $10 million of debt for five years. But here’s where it gets tricky — there are various tranches of debt, some more important than others, such as “super senior” debt, which is the highest of the high, and “mezzanine,” which is the lowest of the low, the holders of which only get paid back before equity holders. That debt has experienced a huge increase in insurance costs — it now costs $569,000 for five years of insurance for $10 million, compared with $401,000 at this time a week ago, according to CDR. By contrast, the top-tier debt will cost $33,000 to insure, still more expensive than the paltry $6,000 asked a week ago, but nowhere near as severe a change. It means more investors expect default. “It seems as though every week another large government sponsored entity steps in to help the market from free falling (or correcting) and yet never quite produces lasting results,” notes Byron Douglass, analyst at CDR.
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