Investing.com — Credit-default swaps linked to SpaceX began trading Thursday after the company completed its first high-grade bond offering earlier this week, Bloomberg reported. The development allows investors to protect against potential losses or bet on the company’s creditworthiness.
Wall Street bond dealers started making markets for swaps tied to SpaceX following the company’s $25 billion bond sale on Tuesday. SpaceX operates rocket, satellite and artificial intelligence businesses.
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The bonds have weakened against Treasuries since the initial sale, indicating selling pressure on the securities.
Dealers began providing price indications for buying and selling protection to investors before the bond offering was announced, according to the report. One dealer’s pricing list showed the cost of protecting SpaceX debt against default for five years at approximately 1.255 percentage points annually, or about $125,500 per year for every $10 million of principal protected.
By comparison, the cost of default protection for , a computer chip manufacturer with similar credit ratings, stands at roughly 0.64 percentage points annually.
Credit derivatives function as insurance-like protection against a company defaulting on its debt obligations. If a corporation fails to pay bond interest, the credit derivative holder can receive a payout. These derivatives typically reflect investor concerns about credit risk before changes appear in the bond market, as derivatives can be easier to trade than actual bonds.
SpaceX’s 10-year notes traded at a spread of 1.57 percentage points on Thursday, up from 1.4 percentage points when they were sold on Tuesday.