Credit-default swaps tied to Elon Musk's SpaceX have begun actively trading after the company sold high-grade bonds this week for the first time, according to people familiar with the matter, allowing investors to hedge against potential losses or to speculate on the creditworthiness of the firm.
Major Wall Street dealers make markets
Major Wall Street bond dealers are making markets on swaps tied to SpaceX after the rocket, satellite and AI conglomerate raised US$25 billion in its bond sale on Tuesday, said the people, asking not to be identified as the details are private.
SpaceX's 10-year notes were trading at a spread of 1.57 percentage point on Thursday, after being sold on Tuesday at 1.4 percentage point. Those bonds have broadly been weakening relative to Treasuries since the offering, signalling some selling pressure on the securities.
Credit derivative pricing details
For credit derivatives, dealers started sending out indications of levels at which they'd likely buy and sell protection — to investors even before the bond offering was announced, some of the people said. One list of prices from a dealer that Bloomberg reviewed had the cost of protecting SpaceX's debt against default for five years at a mid-point of about 1.255 percentage point annually, or around US$125,500 a year for every US$10 million of principal protected.
In contrast, the cost of guaranteeing the debt of Intel Corp., a computer chip maker with similar ratings, against default is more like 0.64 percentage point a year.
How credit derivatives work
Credit derivatives allow a party to effectively buy insurance-like protection against a company defaulting on their debt. If a corporation doesn't pay interest on its bonds, for example, the owner of credit derivatives can receive a payout. When a company's credit becomes riskier, credit derivatives are often the first market to reflect investors' jitters, because it can be easier to buy and sell derivatives than to trade actual bonds.
A spokesperson for SpaceX didn't immediately respond to a request for comment.
