about 5 years ago • 1 min
Here’s an intriguing tale from the lesser-known reaches of the bond market… 📖
A load of professional investors thought they owned insurance against a debt default by Dutch telecoms company VodafoneZiggo. It turned out they were wrong – and nobody noticed. For nearly a year.
Traders who wanted to guard against the unlikely event that VodafoneZiggo couldn’t pay back its debt had bought $600 million of contracts known as credit default swaps (CDS) on the company’s bonds. The only problem was that, following a reorganization of the company’s corporate structure in March 2018, the part of VodafoneZiggo specified in the contracts no longer existed.
Apparently, no one noticed until this month – at which point the value of the contracts obviously tumbled. The lawyers were called in, and earlier this week managed to untangle the mess.
It’s an important reminder that, in the world of investing, even the pros can get it wrong sometimes 🤦♀️
And while everyday retail investors aren’t allowed to buy CDS – they’re the preserve of institutional investors like banks and hedge funds – it’s worth keeping an eye on their prices as an indicator of what the market makes of a company’s (or even a whole country’s) prospects.
For example, CDS on the small Mediterranean nation of Lebanon slid this week (implying less concern about its debt) after a promise of aid from Saudi Arabia.
Story time over!
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