What is the real value of restructuring?

Analysts at several derivatives dealers say the credit default swap (CDS) market is overpricing modified restructuring (mod-R). Mod-R in a CDS should be 1–6%, rather than the current market premium of 5–10%, of the no-restructuring contract spread, according to research released last month by two Goldman Sachs strategists, Klaus Toft, London-based head of credit derivatives sales strategies, and Alex Reyfman, his New York-based colleague .

The implication of Goldman’s research is that protection buyers may be overpaying for the cheapest-to-deliver option in CDS contracts that include mod-R. The research was sparked earlier this year after some clients – particularly those hedging loan positions with CDSs – started asking questions about what exactly they were getting with contracts that included mod-R – and how much they should be paying for this kind of protection.

In the US, mod-R is currently the de facto standard CDS