Wednesday, February 10, 2016

Priced For Implosion

High yield bonds with oil:

As mentioned yesterday, *someone* is betting in size that the Junk Bond market blows up within the next month. By sheer "coincidence", the second largest Natural Gas producer in the U.S., Chesapeake Energy, has a bond issuance maturing on March 15th for $500 million. Also by coincidence, they just hired bankruptcy attorneys AND the company was downgraded by S&P this week. 

This is the stock. 

As ZH reports, their bonds are already priced for bankruptcy:
Chesapeake bonds are yielding 300% annualized

The point I would make is that someone close to this company is making a massive bet that they default between now and March 18th, and in doing so blow up the entire Junk bond market. This bet is not merely a hedge of an existing position, because it's deep out of the money, and it's not against a specific company, it's against the entire High Yield market. An investor hedging would not be making a systemic bet. 

This company has $16 billion in debt that would need to be restructured in the event of a default, which would qualify as a systemic "event", and only the first of many "restructurings".

The dashed horizontal line is the break-even point. The line extends to a 500% gain on the options position:

High Yield market: