Nortel ISDA CDS Auction Presents 15% One Day Return; Is UBS In Serious Trouble?

As we wrote extensively two weeks ago when discussed the ISDA CDS dutch settlement auction, we came to the conclusion that it presents a terrific one-time arbitrage opportunity due to the fundamentals-to-liquidity disconnect in the valuation of a given defaulted security (much more in linked article). Today the Nortel ISDA auction was completed and at first glance is generating a 15% one day returns for any accounts that got involved, as the bond complex is bid 14 post the auction (and closed at 14 yesterday as well), after the ISDA auction had a final clearing price of 12, for a virtually risk free pick up of 2 points or 15%. For anyone who picked up some bonds, nice annualized 5475% return.

Some details from Creditex:

Final clearing price: 12.00
Weighted average limit price based on indicated notional and levels: 8.56
Sell limit orders total notional: $290.47 million
Total broker expressed bid notional interest: $2.1 billion
Bid Interest to Sell order ratio: 13.9%
Brokers expressing notional interest and limits (sorted by proposed limit price):

• Bank of America: $135 @ 11.62
• Barclays: $140 @ 11.47
• Morgan Stanley: $314 @ 10.89
• RBS: $75 @ 10.03
• BNP Paribas: $13.5 @ 9.83
• Goldman Sachs: $311 @ 9.68
• JP Morgan: $265 @ 9.42
• Credit Suisse: $215 @ 8.24
• Deutsche Bank: $295 @ 6.45
• UBS: $326.9 @ 3.78

Some very curious results: in the Lehman auction we noticed that Morgan Stanley was providing many straw man limit bids, all of which did not get hit. The Nortel auction presents that the trading desks of UBS with their $326 million of notional bid and Deutsche Bank at $295 (as well as Credit Suisse to an extent with $215 million) may be in substantial trouble (or just have no viable hedge fund accounts left), as the weighted average bid for UBS was 3.78, while for Deutsche Bank was 6.45. No doubt these trading desks were aware there is no chance in hell these bids would be hit, so they were merely presented for posturing with the notional amount presented, knowing full well they would not have to allocate the capital. Which leads one to believe that they simply do not have the capital available!

As we had mentioned before, ISDA auctions are a terrific way to glean real insight into the true inner workings of assorted trading desks, and the Nortel auction definitely did not disappoint.