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Europcar CDS auction is a case study in market structure. The company triggered failure to pay late last year. The CDS auction happened today.
Deliverable bonds into the auction were trading at 65c yesterday. Total outstanding of 1bln. Turns out only 15% weren't locked up in the bondholder group. Assume those 150mln were held on basis vs. CDS.
There was 700mln total outstanding in CDS so 550 coming from other sources than basis holders. Europcar was in Cover 29/32/33 and 34, the on the run series. 75 names in index so that's 40bln of index right there.
Turns out the auction had an imbalance of 7mln to fill and no bonds could be found. So the CDS recovered par, as no bonds could be delivered. That's 150mln loss for Europcar CDS holders.
What are the lessons here? (1) Price is not value, it's the crossing of the supply and demand of the product being traded (2) when you invest in index products, understanding how the index is built becomes key
(3) it's easy to disguise losses in hedging vehicles. Tomorrow when people try to explain the 15bps move in XOVER they will say "oh the Italy situation is resolving positively" and mentally accept the loss on their hedge. ~10bps of that is Europcar
