Long gone are the days when the CDS market was naively seen as merely a simple hedge to long cash bond positions for vanilla investors (negative basis), or more conspiratorially, a means to naked short the bonds of distressed companies (as many alleged happened during the financial crisis) without being subject to squeezes, margin calls, or regulatory scrutiny courtesy of (what was once) a far more liquid and deep CDS market.
Of particular note in recent months has been rapid, and often confounding, propagation of manufactured credit events in which a CDS is triggered - usually after some collusion between the issuing company and one or more hedge funds - without causing an acceleration in the issuer's debt obligations, as discussed recently in the case of Hovanian, in which the CDS surges benefiting one or more hedge funds and/or the company while impairing others, or a manufactured CDS "orphaning", as was the case more recently with McClatchy, in which a CDS suddenly found itself with no reference securities and plunged to 0, in the process sparking a profit bonanza for hedge fund Chatham which had sold the CDS.
And while manufactured credit events remain niche events for a very select group of highly sophisticated investors, several recent events have prompted Barclays to write an extensive analysis looking at the details and motivations for such events, while addressing potential changes to the ISDA Definitions to reduce their likelihood, including adding a multiple holder requirement and excluding missed affiliate payments from the definition of a Failure to Pay credit event. Furthermore, in the context of the McClatchy event, Barclays' credit analysts also examined the latest, most recent development in the CDS marketplace – a potential manufactured orphaning – and how this may be more difficult to address from a definitions perspective.
Why the sudden focus among some of Wall Street's most active CDS trading desks? Because as Barclays says "we believe that failure to address these issues could lead to a loss of confidence in the CDS market, particularly as an indicator of fundamental credit and default risk, and ultimately to lower levels of trading activity."
Finally, and perhaps most interesting to the hedge funds who are already intimately familiar with the recent synthetic CDS triggers, is which companies are likely to pursue similar strategies, most likely in collusion with one or more hedge fund longs (or shorts) in their CDS universe. For the answer to this, we suggest skipping to the very end of this article.
In the meantime, for those who are relatively new to the topic, here are some observations from Barclays' Jigar Patel, first on why this is an issue to begin with:
An Unflattering Spotlight on the CDS Market
Credit derivatives have been back in the news recently, as investors are once again preparing for the possibility that a CDS credit event could be triggered by an issuer’s – in this case, Hovnanian’s – failure to pay to itself. What makes this situation notable is that CDS could be triggered even though the company remains current on the debt obligations that the company itself does not own. Market participants have started to refer to these types of situations as “manufactured,” “engineered,” or “narrowly tailored” credit events.
While this is not unprecedented – Codere and iHeart took actions that triggered their own CDS – this would be the first instance that we can recall where an investor has worked with an issuer as part of a manufactured credit event to create a new cheapest-to-deliver obligation that trades well below where the other obligations in its capital structure are priced.
To understand how this is permissible, we need to look at the current definition of a Failure to Pay (FTP) event under the 2014 ISDA Credit Derivatives Definitions (emphasis added):
Section 4.5. Failure to Pay
"Failure to Pay" means, after the expiration of any applicable Grace Period (after the
satisfaction of any conditions precedent to the commencement of such Grace Period), the
failure by the Reference Entity to make, when and where due, any payments in an
aggregate amount of not less than the Payment Requirement under one or more
Obligations, in accordance with the terms of such Obligations at the time of such failure.
The current definitions do not make a distinction between missed payments to external creditors and missed payments to affiliates, likely because the writers of the ISDA Credit Derivatives Definitions did not envision a scenario where a company would repurchase some of its debt, keep it outstanding, and then choose to not repay it.
So why the growing concerns?
The use of manufactured credit events has been causing concern in the marketplace because it divorces the value of CDS from the economic outcomes of issuers. To help understand why issuers might want to trigger their own CDS, let's look at the different motivations for issuers and CDS investors.
Motivations for Manufactured Credit Events
There are a number of reasons why an issuer might want to trigger CDS. While it has no direct involvement in CDS contracts (as it is not a counterparty to the instrument, unlike bonds), it can be affected by the motivations and incentives of investors that have CDS risk. For example, an investor that owns CDS protection would benefit from a widening in CDS spreads and an eventual default, whereas one that has sold CDS protection would have an incentive to help delay or prevent a CDS trigger.
In the case of the former, the issuer could particularly be affected by the protection holders’ incentives if they own bonds against their CDS protection (which is referred to as a negative basis package). The basic idea behind a negative basis package is that the holder is able to generate carry on a credit-hedged position, which may also have positive jump-to-default exposure if the package is purchased below par. Negative basis holders generally benefit from a CDS trigger, as they can effectively physically settle their risk by delivering their bonds into the auction and collecting par. In the absence of a CDS trigger, these investors would prefer to maintain the status quo so they can continue to clip their credit-hedged carry. As a result, they tend to be resistant to any transactions that might upset their negative basis trades, such as an out-of-court debt exchange.
From the issuer’s perspective, investors that hold bonds on basis can be problematic, as their interests are not always aligned with the issuer or other investors that own bonds outright. In the past, the concept of “basis busting” transactions has been mentioned in situations where the market perceived the presence of basis holders to be a potential roadblock to refinancing transactions that involved below-par debt swaps. One example of a “basis busting” transaction is an exchange structured as a succession event that splits the CDS contract in two, but leaves the bonds held on basis at the original entity. Basis holders would now have a mismatch between their CDS and their bond exposures. This was one of the concerns that worried basis holders in Caesars in 2014 and led to the basis package for the 10% of 2018 bonds to trade into the low $90s. Ultimately, the company filed for bankruptcy and the basis holders received par.
When the Interests of the Issuer and CDS Protection Holders Are Aligned
There can be scenarios where the interests of the issuer and protection holders are aligned. For example, a CDS protection holder could offer favorable refinancing terms to an issuer in return for that issuer creating a trigger event for CDS. The issuer benefits, as it receives some debt relief, which could also benefit bondholders if it makes the issuer more viable as on ongoing concern, and the protection holder potentially benefits if the profit that it earns from the CDS protection exceeds any potential haircut that it may have endured in the refinancing transaction. The protection holder would not have been able to offer the same financing package to the issuer without the profits from the CDS market, so it is effectively sharing some of the CDS profits with the issuer at the expense of protection sellers.
While in most cases, we think of CDS protection holders and issuers as having conflicting incentives, there have been examples where their interests were aligned. In 2006, Cendant split into four main operating subsidiaries, and the transaction effectively left Cendant CDS orphaned, as the company was required to tender for its existing bonds (as per the indentures) and it subsequently issued new non-guaranteed debt from its remaining operating subsidiary (Avis). Following the decision, Cendant CDS tightened 80bp. Several months later, the company (now renamed Avis Budget Group, Inc.) agreed to guarantee the bonds issued by the Avis subsidiary in exchange for $14mn “from certain institutional investors,” making Avis bonds deliverable into Cendant CDS and causing CDS to widen. In terms of more recent history, we look at the circumstances surrounding the 2013 trigger of Codere CDS.
Past Examples of Manufactured Credit Events
The Codere CDS credit event received much attention in the press, and we base our description of the situation on news reports from that period. In the first half of 2013, GSO Capital Partners and another firm purchased a $100mn Codere loan in the secondary market and agreed to new terms, including extending the maturity by six months. Codere had to agree not to pay any interest due under its USD or EUR senior notes within their specified grace periods; otherwise, a mandatory prepayment would be due on the loan. As a result, to avoid triggering the mandatory prepayment, Codere did not make the August 15, 2013, interest payment on its 9.25% of 2019 USD note until September 17, 2013, two days after the end of the grace period specified in the bond indenture. The late payment did not lead to acceleration of the USD and EUR notes, as a majority of holders agreed to provide forbearance because the bonds were closely held.
However, due to the late interest payment, the ISDA Determinations Committee (DC) ruled that a FTP credit event had occurred. At the time, it was reported that GSO had purchased CDS protection and therefore profited from the credit event, which was criticized by some media outlets. According to a statement from GSO, it believed that its interests were actually aligned with those of the company, as it had put money into it and believed that it had saved it from bankruptcy. In addition, it viewed the CDS trigger as necessary and the only way to get certain bondholders to negotiate. In other words, it believed that it had provided Codere with a lifeline when no one else would.
One observation supporting GSO’s argument is that even before the market started considering the potential for a near-term technical trigger, Codere’s bonds and 5y CDS were already trading at stressed levels, indicating a high likelihood of default. At the start of 2013, 5y CDS was trading at 31pts upfront, indicating greater than a 75% percent probability of default in the next five years.
The main difference between this situation and other CDS triggers was that it was not the result of a true default, but was instead a technical trigger engineered for the benefit of a specific investor. Ultimately, however, it is difficult to say whether the company would have been able to continue to pay its obligations without the assistance of the investors that purchased the bank loan.
The iHeart situation is unique, as it is the first example that we can recall of an issuer’s CDS triggering due to the failure of the issuer to pay principal or interest on bonds that the issuer itself owned. In December 2016, iHeart decided not to repay $57.1mn of principal on the 5.5s of 2016 note that was due to an affiliate, Clear Channel Holdings, but it did repay $192.9mn of principal on that same note that was held by outside investors. The ISDA DC ruled that the failure to repay the principal in full constituted a CDS credit event.
The company had opportunistically sought to conduct small liability management exercises (LMEs) over several years preceding the credit event, and perhaps clearing out basis holders by triggering CDS would have paved the way for more comprehensive LMEs. But in this case, we do not believe that triggering CDS was the company’s primary motivation not to repay the principal. Instead, we believe that iHeart was trying to prevent the triggering of a springing lien condition on its term loans, PGNs, and several tranches of legacy notes. The springing lien would have been triggered if the outstanding balance of its legacy notes declined below $500mn, which would have occurred if the company had repaid the principal due in full.
While the company may not have been directly targeting the triggering of CDS, the outcome was still a significant event for the CDS market, as it essentially provided a roadmap by which other issuers could similarly engineer a CDS trigger.
Hovnanian Enterprises – What We Know
While the situation is fluid, here are the highlights: the company entered into a refinancing agreement with GSO whereby it received favorable financing terms in return for agreeing not to pay interest on bonds owned by a subsidiary, which if the iHeart CDS trigger is any guide, could trigger CDS. The refinancing agreement also resulted in the creation of a new low-coupon, long-duration bond, which would be, if deemed deliverable, the cheapest-to-deliver obligation. According to Bloomberg, a court proceeding also unveiled that GSO had purchased $333mn of Hovnanian protection before arranging the deal.
More specifically, according to an 8-K filed on December 28, 2017, Hovnanian offered to exchange up to $185mn principal amount of its 8% of 2019 notes for a combination of cash, new 13.5% notes due 2026 and new 5% notes due 2040 (this bond would be the lowest dollar-price bond in the capital structure). At the same time, the company entered into a support agreement with GSO, whereby the latter agreed to tender no less than $126.8mn of the 8% of 2019 notes in the exchange offer. As part of the exchange offer, $26mn of the 2019 notes would be purchased by a subsidiary of HOV, and as per the indenture governing the new notes, the company would not be permitted to make any interest payments on the purchased notes prior to their stated maturity. The transaction was completed on February 1, and Hovnanian subsequently announced that it had skipped the May 1 $1.04mn interest payment due on the $26mn of bonds held by a subsidiary.
In the December 28 8-K, Hovnanian acknowledged that the missed interest payment “may result in the occurrence of a ‘credit event’ under certain credit default swap contracts entered into by third-parties, resulting in significant monetary exposure for those entities that sold such credit default swaps.”
The Hovnanian situation is particularly notable, as it incorporates elements from the Codere CDS trigger (favorable financing in return for a CDS trigger) and the iHeart one (withholding payment from subsidiary-owned bonds to trigger CDS). And it introduces a new element: the creation of a new cheapest-to-deliver obligation. Prior to the announcement of the exchange offer, the lowest dollar-price obligation in the Hovnanian capital structure was the 2% of 2021, which was trading in the high $80s. After the exchange offer, the lowest dollarprice bond is now the 5% of 2040, which appears to have last traded around $40. The motivation for Hovnanian to participate in the manufactured credit event is fairly clear. It received a more favorable financing package than if it had tried to refinance at prevailing market levels. And for GSO, in return for providing Hovnanian with attractive financing, it expects to profit on its CDS position.
While the missed interest payment will likely result in a credit event, the DC will not be able to make a determination until after the 30-day grace period for the missed interest payment expires at the end of May. And then, even if CDS does trigger, the outcome in terms of recovery remains uncertain, as there appear to be a number of investors on the other side of the CDS trade. Recovery may ultimately be driven by the amount of physical settlement requests in the CDS auction. Hovnanian is also attempting to exchange $840mn of existing debt into new 3% notes maturing in 2047, which, if successful, would result in a greater supply of low dollar-priced bonds for the auction.
A Call to Action: Market Participants and Regulators React
To date, there have been several indications that industry participants and regulators are exploring ways to address the issue of manufactured credit events. On March 13, Bloomberg reported that a number of hedge funds were working together to try to come up with ways to close the loopholes in the existing ISDA documentation that allow investors to profit from manufactured credit events.
Separately, on April 11, the ISDA Board released a statement in which it noted that manufactured credit events ”could negatively impact the efficiency, reliability and fairness of the overall CDS market.” However, in terms of its own ability to address manufactured credit events, it said that the ”determination process does not allow the DC to make subjective decisions, or to consider the intent or good faith of the parties.” In other words, the DC members are limited to what can objectively be determined from publicly available information. The Board has instructed the ISDA staff “to consult with market participants and advise the Board on whether further amendments to the ISDA Credit Derivatives Definitions should be considered.”
Less than two weeks later, on April 24, the Commodity Futures Trading Commission (CFTC) released its own statement on manufactured credit events. In the statement, it referred to portions of ISDA’s statement and then added its own comments:
”Manufactured credit events may constitute market manipulation and may severely damage the integrity of the CDS markets, including markets for CDS index products, and the financial industry’s use of CDS valuations to assess the health of CDS reference entities. This would affect entities that the CFTC is responsible for overseeing, including dealers, traders, trading platforms, clearing houses, and market participants who rely on CDS to hedge risk. Market participants and their advisors are advised that in instances of manufactured credit events, the Divisions will carefully consider all available actions to help ensure market integrity and combat manipulation or fraud involving CDS, in coordination with our regulatory counterparts, when appropriate.”
The CFTC’s statement that “manufactured credit events may constitute market manipulation” could serve as a deterrent to future attempts at manufacturing credit events, as corporations and investors may be hesitant to get involved in a transaction that could be considered to be risky from a legal perspective. However, it appears that CFTC Chairman Giancarlo’s preference is for the situation to be resolved by ISDA and market participants, based on these comments that he made on Bloomberg Television on April 30: “Often, the best evolution is through market participant action,” and, “There’s an opportunity for ISDA to clarify the appropriate way for such defaults to be done. It’s time to take another look at their documentation.”
Moving Forward: Some Potential Adjustments
There are clearly concerns among market participants about the implications of manufactured credit events. Barclays suggests some potential ways to address them below, and notes that a combination of these solutions could be effective:
- Introduce a Multiple Holder Requirement
The FTP definition could be amended to include the concept of “multiple holder obligation,“ which is already used in restructuring credit events. Under restructuring, this is an obligation held by more than three parties that are not affiliates of each other, and for which at least two-thirds of holders consent to the event that constitutes a restructuring credit event. If the concept were introduced to the FTP definition, it would require any obligation (or portion thereof) that was subject to the missed payment be held by more than three holders that are not affiliates of each other and at least two-thirds of holders of the obligation be affected by the missed payment. This would prevent an issuer from selectively not paying a small group of investors or even itself in order to trigger CDS. The only downside could be that lenders of bilateral or closely held loans might not view CDS as a viable hedge. This would put some burden on the DC to determine if multiple holders exist, and the burden of proof would likely have to turn to publicly available information as in the case of credit events.
- Exclude Missed Affiliate Payments
Explicitly excluding the failure of an issuer to pay itself from the FTP definition should make it more difficult for issuers to trigger their own CDS. On its own, this amendment would not be as effective as the multiple holder obligation, as it would still be possible for an issuer to miss a payment to an investor and therefore trigger CDS without triggering cross-defaults (assuming a majority of holders provide forbearance, as in Codere), but it would address the scenario where an issuer pays everyone but itself (although this should be covered by the multiple holder requirement). An alternative solution to excluding missed affiliate payments would be to exclude affiliate-owned obligations from the definition of “Obligation.”
- Increase Payment Requirement Threshold for FTP
Currently, the amount of the missed payment, referred to as the Payment Requirement in the Definitions, must be at least $1mn for a FTP to trigger. Increasing this amount could make it more difficult for issuers to miss a sufficiently large payment on debt that it owns. For example, the amount of interest that Hovnanian failed to pay on the $26mn of notes held by an affiliate was $1.04mn. If the Payment Requirement had been $5mn, the company would have had to repurchase at least $125mn of notes to meet that threshold, which might not have been feasible.
The $1mn and $5mn thresholds are arbitrary levels; an alternative option would be to increase the threshold for FTP to whatever it is for cross-defaults. This can be problematic, though, as the instruments of the company may all have different cross-default levels, so it would likely have to be based on a lowest common denominator. Sometimes, certain documents may be more difficult for investors to obtain, and increased complexity to this level would likely not be good for liquidity. This needs to be balanced against the potential for lower participation due to recent negative headlines.
- Restrict Deliverability of Obligations Created for Credit Event
Eliminating the deliverability of bonds that appear to have been created specifically for use in a credit event would be another way to deter potential manufactured credit events, but implementing such a restriction would prove troublesome, as it would introduce some subjectivity into the DC process. In addition, it could lead to a situation where there are no suitable deliverables for the auction process; therefore, this is a less feasible solution.
Implications of Not Addressing Manufactured Credit Events
Probably the biggest potential implication of not addressing manufactured credit events is a loss of faith by market participants in the CDS product, particularly for those contracts that reference stressed/distressed credits (as these would be the most susceptible to manufactured events). CDS volumes have tended to increase in situations where investors become more concerned about credit risk, as investors use the product to hedge or go short. A recent example is the telecommunications sector, where widening, particularly in Windstream and Frontier, has coincided with a pickup in trading activity.
Less confidence in the reliability of the product as a true market-based indicator of fundamental credit and default risk could lead to lower usage, as investors could increasingly worry about a disconnect between trading levels and actual default risk, even in cases where credit risk is increasing.
From a valuation perspective, if manufactured credit events go unaddressed and investors start to believe that such events are more likely, that could lead to flatter CDS curves and a more positive front-end CDS cash basis, as front-end CDS should arguably be more valuable.
There has been a move in this direction after the iHeart event, but the recent manufactured orphaning of McClatchy could be a force in the opposite direction.
Addressing a Different Event: Manufactured Orphaning
While the focus so far has been on situations where an investor works with an issuer to trigger CDS, the market has recently been grappling with a different type of transaction: a manufactured orphaning of CDS. In this case, an investor has worked with an issuer to move its outstanding debt obligations from the existing CDS reference entity to a new entity without triggering a CDS succession event.
This would result in the CDS contract being orphaned, as it would reference an entity with no (or very few) deliverable obligations. The transaction relates to The McClatchy Company: according to an 8-K filed on April 27, 2018, The McClatchy Company entered into a framework agreement with Chatham Asset Management whereby Chatham will make $418.5mn of loans split across two term loan facilities to a new wholly owned subsidiary of McClatchy. The company will then use some of the proceeds to repurchase approximately $356.1mn of senior unsecured bonds (2027s and 2029s) from Chatham and $50mn of its existing senior secured 9% of 2022 notes. The framework agreement is contingent on the company’s ability to refinance the 9% of 2022 notes out of the new wholly owned subsidiary.
Assuming the transaction is successful, debt at the current CDS reference entity, The McClatchy Company, will fall from $710mn to approximately $8mn, which represents the portion of the senior unsecured bonds that Chatham does not currently own. And based on how the transaction is structured, the CDS contract is not likely to succeed (or move) to the new wholly owned subsidiary even though the company’s debt obligations have effectively been “moved” or refinanced from there. Also the debt at the new subsidiary will not be guaranteed by the reference entity for the existing CDS, as there is no mention of such an agreement in any of the filings.
In the McClatchy transaction, the new wholly owned subsidiary is not assuming any existing obligations, and the word “exchanged” is not used in relation to the new term loans and the repurchase of the senior unsecured debt. While one could argue that the new term loans are effectively being exchanged for the existing senior unsecured debt, especially since it is the same investor in both transactions, the ISDA DC has historically tried to avoid subjective interpretations of transactions and instead has relied on what is literally stated in the publicly available information. As a result, if the transaction is completed as described in the 8-K, that CDS is likely to remain at the existing entity and will basically be orphaned.
So far the market has agreed: prior to the transaction being announced, 5y CDS was quoted 12.5pts/15pts in upfront terms. By the end of the day, it was quoted 300/375bp, which represents a change of approximately 20pts in upfront terms, or 20% of notional.
Motivations in a Manufactured Orphaning
Bloomberg is reporting that Chatham had sold CDS protection. If this is the case, it would benefit from a CDS orphaning. While McClatchy does not receive a direct benefit from the orphaning itself, as it is not a counterparty to CDS, it stands to reason that in a scenario where Chatham had sold CDS protection, McClatchy likely had to agree to issue the new loans out of a new entity as a condition of the refinancing agreement. As a result, it would indirectly benefit from the orphaning, as the CDS profits that Chatham would earn from an orphaning would allow it to offer McClatchy more favorable financing than it likely would have been able to secure in the market.
Potential Market Effect
Concerns about manufactured orphaning events could lead to greater scrutiny of refinancing transactions, particularly in situations where one investor has a large position. These concerns could also make investors more hesitant to buy CDS protection, particularly in credits with a small amount of deliverables outstanding. In the case of McClatchy, assuming the transaction goes through, the CDS reference entity will still have approximately $8mn in debt outstanding, and it is theoretically possible that the company could still issue out of the reference entity.
Furthermore, in a recent example, a reference entity that was considered to be a dead box ultimately filed for bankruptcy and CDS recovery was very low. In mid-2014, Alpha Appalachia Holdings (f/k/a Massey) 5y CDS was trading around 150bp, and the company had only one deliverable: the 3.25% of August 1, 2015, with $109mn outstanding. CDS net notional was approximately $150mn, so it was not a situation that garnered much attention. By the fourth quarter of 2014, CDS started to widen sharply as the company became stressed, and ultimately it filed for bankruptcy in August 2015. A CDS auction was held and CDS settled at a final price of $6. We think this situation illustrates the potential risk of overlooking situations where a high yield reference entity trades like a dead box, yet still has some deliverables outstanding. This is a risk that index investors need to be aware of as well, as Alpha Appalachia was a member of CDX.HY series 6-15, and series 15 was still active at the time of the CDS credit event.
Another Problem: The CDS Auction Process
Another source of concern for CDS credit events is the functioning of the auction process, particularly where CDS net notional outstanding is large compared with the amount of deliverables. Investors worry that the final price in the auction could be quite different from where the market is pricing recovery, due to technical factors related to physical settlement requests.
Despite these concerns, the auction has functioned well as a self-policing mechanism for the CDS market. Of the 48 auctions for North America corporate CDS since 2009, nearly 70% had a final price that was within 2pts of the IMM, and the largest difference was 8pts (Figure 2). The small amount of movement from the IMM, which presumably is reflective of dealers’ views on recovery, to the final price indicates that the auction mechanism generally works as intended.
The main reason auctions have not settled far above the IMM in credits with a small amount of deliverables relative to CDS outstanding is the presence of basis holders. Of the 48 auctions in the sample, 36, or 75%, had sell imbalances. This includes RadioShack, which at the time of its auction in 2015 only had $325mn of deliverables, versus nearly $480mn of CDS net notional outstanding. RadioShack was frequently mentioned as a potential case where the auction mechanism might not work as intended, but the presence of basis holders helped mitigate those concerns.
One factor that historically has affected the final price is the size of the net open interest of physical settlement requests following the first stage of the auction. But it is not the absolute size of the imbalance of physical settlement requests that matters, but rather whether it is significant relative to the amount of deliverables outstanding. Figure 3 above compares the ratio of the imbalance to deliverables with the change from IMM to final price for the 42 auctions for which we have deliverables data. The chart shows that situations where the imbalance is large relative to the amount of deliverables outstanding tend to have a larger move from IMM to final price. While the majority of auctions have had sell imbalances, it is theoretically possible for a buy imbalance that is large compared with the amount of deliverables outstanding to drive the final auction price well above the IMM.
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For those who are familiar with all of the above, this is the only part that matters: how to find the next potential manufactured CDS event, or specifically, how to screen for outsized CDS risk.
One way, according to Barclays, for investors to be aware of situations where CDS could have an outsized influence on a reference entity or where there could be concerns about the auction process is to monitor the size of CDS risk relative to available deliverables. Figure 4 lists the top ten credits in CDX.HY series 30 by ratio of CDS net notional to bonds outstanding. Although loans are deliverable into senior unsecured CDS, they are excluded from this exercise, as they tend to trade at a very high dollar price (the same argument can be made for some first lien bonds, but their prices tend to be more disperse). It is notable that Hovnanian and McClatchy appear in the list.