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Troubled bond insurer MBIA Insurance Corp., communications company Alcatel-Lucent USA Inc. and Parker Drilling Co. are among a series of companies whose debt will be referenced by a key derivatives index when it moves to a new series Monday, according to data company Markit.
The updated CDX North America High-Yield Index, administered by Markit, is a gauge of creditworthiness for each of its 100 constituents. The index rolls twice a year to a new series, and this month's update will be its 16th version.
Credits that were in the 15th series of the CDX High-Yield but haven't been put forward for the update include MBIA Inc., Tyson Foods Inc., Flextronics International Ltd., Pride International Inc., Massey Energy Co., Dole Food Co., AMR Corp., Constellation Brands Inc. and Beazer Homes USA Inc., Markit said.
The final list is based on the frequency with which each credit has been traded in the last six months, as determined by swaps data held in the Depository Trust & Clearing Corp. It is also designed to match sector and ratings weights in Markit's iBoxx USD High Yield Liquid Index for high-yield bonds.
Replacing the nine companies removed are: MBIA Insurance, PMI Group Inc., Kinder Morgan Kansas Inc., Pioneer Natural Resources Co., MGIC Investment Corp., Universal Health Services Inc., Parker Drilling, Alcatel-Lucent USA and Olin Corp.
Every time a credit derivatives index rolls to a new series, the companies that are included are those that are perceived as most relevant to the market--sometimes because they are the subject of takeovers or mergers, and sometimes because they are seen as either deteriorating or outperforming.
Credit derivatives are tradable, over-the-counter contracts--most commonly sold in the form of credit default swaps--that function like insurance for corporate debt. If a borrower defaults, the seller pays the buyer compensation; and in the case of an index trade, the swap buyer receives compensation on a pro rata basis, reflecting the weighting of the defaulting company in the index.
The names leaving Series 15 of the CDX High-Yield trade with an average five-year CDS spread of 390 basis points, reflecting a cost of $390,000 per year to insure $10 million of the debt for five years. By comparison, the names entering Series 16 trade with an average five-year CDS spread of 483 basis points, or $483,000 a year.
-By Katy Burne, Dow Jones Newswires; 212-416-3084; email@example.com