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ICICI CDS – how badly is it impacted?

So if ICICI has about 6,000 to 8,000 cr. of CDS exposure, of which a little was sold recently, are they going to be hit by Lehman’s bankruptcy and the resulting dramatic increase in CDS spreads?

Lehman’s exposure is supposed to be $800 billion in CDS alone. And the CDS on LEH debt is now expecting 40 cents on the dollar. That means CDS writers will need to pay out the remaining 60 on whatever Lehman borrowed. Even with spreads at 800 basis points, that’s not going to cover it (you need a premium of 6000 basis points to cover that).

So CDS writers are hosed if they wrote LEH debt. They’re hosed if they wrote any CDS because now no one knows who’s next. CDS writers are hosed. It’s probably the best time to write a lot of diversified CDS at obscene rates, though. Can’t get any better than this – a broad strategy writing CDS on unaffected sectors should make it. But who’s got capital?

Will ICICI get hurt? I’m sure it will – and the mark to market losses are not going to be pretty. I’m getting myself ready for a sombre October.

Disclosure: No positions. Short in SoS.

  • Rohit Chauhan says:

    >Hi deepak

    Mark to market losses are not necessarily a true reflection of the underlying value of the option (in both directions).

    The losses become actual if the underlying event – credit default or downgrade occurs.

    In case of lehman that has happened. now this would cause the CDS values to increase and cause MTM losses for ICICI. however if the underlying event does not occur, these losses could be reversed once the CDS closes

  • Deepak Shenoy says:

    >Rohit: That’s unfortunately the exact thinking that destroyed Lehman. Read about how they decided certain liabilities were not recorded for that reason, and tehn the CFO was fired because Einhorn discovered it, and then the house of cards fell apart.

    The figure doing the round is $200 million in M2M. That wipes out one quarter’s profit.

    Either ways the stocks down 100 Rs. in one week. This bank is in some trouble, serious trouble.

  • Rohit Chauhan says:

    >Hi deepak

    I am analysing the icici bank AR. There not too much transparency on the CDS and other derivatives. at the same time other banks such as hdfc have derivatives too.

    you are right never knows what is beneath the hood. however i think the situation is not same for icici and other indian banks and Lehman or other us banks.

    lehman and other wallstreet banks had exposure to mortage based CDS which ruined them. indian banks may not be having a big exposure to the same

    i am analysing icici and other banks from a failure standpoint and not from an investment standpoint. i have avoided banks for sometime now considering that they are too complex for me and one cannot figure the risk

    however from the losses i see, icici could get hit , badly too…but i still cannot see that the bank can fail due to these losses

  • Deepak Shenoy says:

    >Rohit: LEH’s downfall was not so much the CDS, but CRE exposure in general, typically direct. ICICI has exposure to corp debt abroad through CDS. There is almost no recourse in India, if, for instance Tata/JLR defaults on it’s US debt – ICICI will have to pay. Plus, how can we be sure it’s only Indian corporates – that’s what they say, but I don’t know I can believe them.