Protection selling of own debt securities

[cidare]

Hi David,
I would like to learn if it is possible for a company to sell protection on their own debt securities or own country bonds by CDS. The company can buy protection on its debt, but how about selling? I suppose it can not sell. Do you know any paper published about this?
Thank you very much.
Best regards,

 

[Eltanariel]

Hello,
I don't understand why someone would agree to buy those kind of cds as the cds writter and the underlying debt will have a correlation of 1 (so no protection at all as the cds writter will be in default)

 

[David Harper CFA FRM]

Hi @cidare I am not aware of such an example, nor would I expect to see such an example for the same reason that @Eltanariel identifies: this seems like a most extreme case of wrong-way risk. A company of course can buy protection on its own debt, per your example, but its counterparty is somebody else, whose credit quality is presumably uncorrelated (or lowly correlated) to the company's own credit quality (and hence the exposure of the CDS). But if a company could write a CDS on its own debt, the wrong-way correlation would seem to be near to 100%! The CDS is triggered, after all, by a credit event, which presumably would also render the company unable to fulfill its CDS obligation. (This question reminds me a little bit of the discussion over US sovereign CDS, which is, why would anybody buy protection on US default when, presumably, the trigger would be associated with something like a zombie apocalypse wherein all CDS counterparties are unable to fulfill the protection obligation. In other words, another example of extremely wrong-way risk. But Matt Levine explained why they can still be desirable for structural reasons https://www.bloomberg.com/view/arti...d-anyone-buy-credit-default-swaps-on-the-u-s- ... I cannot myself really apply even his logic to the single-name corporation because, if a company wrote credit protection, then it is doubly incentivized to avoid default. I raise this only because the CDS is not necessarily an instrument to hedge default). I hope that's helpful.

 

[cidare]

Thank you very much @David Harper CFA FRM and @Eltanariel. Your answers are very helpful.