Baby Hang On.

I tried making this short but was just too much and I couldn't make a long-ass tweet about it. So I had to resort to a blog I even forgot I had created but nothing on. Hopefully I don't get to use this again in the near future. Forgive any typos, I speak 3 languages and English happens to be my 2nd language.

Astaldi (BIT‎:AST) is a construction conglomerate headquartered in Italy. This has been a long CDS position since we heard rumours of a potential massive loss. Now typically i.e the sound thing, one should never trade on rumours but this was a no-brainer as we saw it after running some scenario analyses. Why? because we had to identify regions that Astaldi was most exposed to. Only one sovereign stood out: Freaking Venezuela. Now knowing what I already knew of socialist Venezuela, that's where the loss had to come from when they were to report earnings in Nov. Venezuelan socialist leadership has collapsed the economy and corporates have suffered for a long time there. Case in point: see ConocoPhilips - currently in a structured settlement deal with socialist Venezuelan gov (read what happened to COP's assets in the socialist nation).

A TRS trade was considered but due to liquidity issues, CDS position was best to play it out. Hedge was in place as well but won't go into it.

Before delving into the specific Venezuela situation, Astaldi has been the unlucky dork in high school who was once the popular kid in primary school. It had been on a good run despite its stupid geostrategic positioning, I mean c'mon, how does one fuck up that bad, having massive operations in 3 debt-ridden & systemically vulnerable nations? This is pain waiting to happen.. in which case it's already happening.

Venezuela was a painful and soured investment. Astaldi lost all its assets in the socialist nation, and a heft loss at that! which they will never recover. They announced on Nov the loss as we expected, but it was much higher to the tune of EUR 230 million with an estimated recovery rate of 47%.

Now early this year, embattled Astaldi was trying to get a capital injection from outside investors, including IHI Corp.

A deal was reached of course, but it was conditional on the sale of Astaldi’s stake in a bridge project spanning Istanbul’s Bosphorus.

Probabilty of Astaldi going under in next 12 months is currently 1/3.

Now, come late last month, Astaldi announced that they filed for creditor protection (concordato preventivo), which allows the company to continue as a going concern. The question now became whether or not that would trigger a bankruptcy event, and it appears that opinions are split on this. In any case, it is worth highlighting that there are subtle differences in how “bankruptcy” is defined depending on whether your CDS contract is governed by the 2003 or the 2014 definitions. Under the 2003 definitions, a proceeding seeking relief under bankruptcy law constitutes “bankruptcy”, provided it is not dismissed of course. Under the 2014 definitions, only proceedings seeking a similar relief to a judgement of insolvency constitutes “bankruptcy”. With Astaldi on the brink of bankruptcy, unfortunately or fortunately, the iTraxx Xover is bound to be a 74-member-index in the not too distant future.

Astaldi has been victim to a slew of rating downgrades from S&P all year to the latest downgraded sending it to a "high default risk entity".

Prior to last year Nov, Astaldi's (being HY) CDS had been trading mostly around 1000bps. Now if the company bankrupts next year, a contingent CDS would look good in hindsight, but that's not what positioning is about.

Analyzing the default prob within a year's time, we can see it's now greater than 1/2 chance.

Yes, you read that right. Welcome to the world for High Yield.