Overheard: Credit Market Surprises

June 23. Wall Street Journal

The credit-derivatives market is full of surprises. At the height of the crisis, Kazakhstan was regularly listed as one of the most distressed sovereigns in the world, based on its credit-default-swap prices. There is just one small problem: Kazakhstan has no international bonds outstanding to default on.

Some suggest that dollar bonds of the national railroad company might be deliverable under the contract, but the picture is murky. Still, that doesn’t mean there is free money to be made. Credit default swaps on U.K. supermarket operator J Sainsbury – another borrower that had redeemed all of its bonds outstanding but on which swaps continued to trade – jumped on Wednesday as it announced plans for a convertible-bond issue.

Those new bonds should be deliverable under the contracts. Killing off a CDS contract is tougher than it might seem.