Credit Derivatives Innovators Merging
July 25, 2006
Creditex and CreditTrade, brokerage and transaction processing specialists that were both formed in 1999 and grew up on the subsequent boom in credit derivatives, announced a merger agreement today. Closing is expected within two months, pending regulatory approvals, and the combined firm, Creditex Group, will have 225 employees and this year will execute an estimated $2 trillion in notional value of single-name, emerging-market, index and index tranche credit derivatives.
The companies said that they will have leadership positions in "the most strategic and fastest-growing sectors" in the burgeoning credit default swaps (CDS) market--European and North American indices and structured products--as well as "strong positions across all single-name sectors and emerging markets." CDS overall have been growing more than 100 percent in each of the past few years to reach $17 trillion notional in 2005, according to the International Swaps & Derivatives Association.
CDS activity is increasingly concentrated in fewer brokerages, calling into question the long-term viability of smaller operators, said Paul Ellis, CEO of CreditTrade, a top voice brokerage in the credit markets with a CDS, index and structured-products focus and a range of transaction, data and trading-platform services. "We want to be number one or number two," he told Securities Industry News, and the merger accomplishes that end.
Ellis' counterpart at Creditex, Sunil Hirani, stressed the complementary nature of the two organizations. The combination creates scale that neither partner had on its own, as well as the ability to serve as a single source for the three trading options: voice, electronic and hybrid. "Regardless of how the trade is made," Hirani added, "we process it electronically."
"We were really designed for each other," said Hirani, who co-founded Creditex as a pioneering electronic trading platform for the asset class. It has more than 1,000 traders on its system, which executed just under $1 trillion notional of CDS index, single-name CDS and standardized structured credit products last year. Creditex, which was formed by a banking consortium, had several milestones in 2005, including a $50 million minority investment from Boston-based private equity firm TA Associates announced in June. It also joined with Markit Group and major dealers in March 2005 to improve market confidence and transparency with Tradeable Credit Fixings, and a year ago it spun off T-Zero to automate the complex, often problematic post-trade CDS workflow. CreditTrade joined T-Zero in April to ensure straight-through processing efficiencies for its clients.
"This consolidation of two strong players is welcomed," said Guy America, head of European credit trading at JP Morgan Chase & Co. "The combined company will be a major liquidity provider globally across all credit derivative sectors and products."
Simon Morris, head of European credit trading at Goldman Sachs & Co., said: "Creditex pioneered the revolution in electronic trading in the CDS market. The combined company will undoubtedly continue to be a leader in innovation and offer the highest level of client service."
The financial terms of the transaction were not disclosed. Creditex Group will have offices in New York, Hoboken, N.J., London and Singapore.
The post-merger roles and titles of Ellis, Hirani and others will be decided over the next couple of weeks, Ellis said, because "at this stage we have been concentrating on getting the right deal for our shareholders." CreditTrade is 27 percent-owned by publicly traded Internet Capital Group (ICG) of Wayne, Pa., which survived the dot-com downturn as manager of a portfolio of software, services and e-commerce companies.
