DelphX Introduces Industry-First Credit Rating Security Product; Will Enable Bond Holders to Protect Against Rating Downgrades on Existing Bonds
Toronto, Ontario--(Newsfile Corp. - November 8, 2022) - DelphX Capital Markets Inc. (TSXV: DELX) (OTCQB: DPXCF) ("DelphX"), a leader in the development of new classes of structured products for the fixed income market, announced today the addition of a novel Credit Rating Security (CRS) product that will give bond holders and traders the ability to position against potential rating changes on existing bonds. This represents a very large market, as most institutional-quality bonds carry creditworthiness ratings ranging from AAA (strongest) to C or D (weakest) from rating agencies such as Moody's, Standard & Poor's, and Fitch. These ratings are not static, but often fluctuate during the life of a bond, affecting the market value of the underlying asset. Due to the revolutionary nature of this industry-first product, DelphX has filed a provisional patent to protect its intellectual property rights ahead of the initial launch.
The new CRS product is based on the Company's Collateralized Put Obligation (CPO) and Collateralized Reference Note (CRN) products, which have already been proved and tested in the marketplace. The development of this rating-triggered CRS product came from discussions with bond desks seeking transactional volume as well as large portfolio holders, who have historically had access to long-term protection against defaults during the life of a bond, but lacked a mechanism to protect against rating downgrades that can reduce the value of the bond prior to maturity. This is a major problem for portfolio managers with strict rating mandates, particularly insurance companies and pensions, who face capital charges and forced sales when the bonds they hold are rated below certain thresholds.
The DelphX CRS product solves this problem by creating a collateralized reference note designed to cover the expected reduction in value of a bond following a rating downgrade, such as from BBB to BB. The collateral sets a maximum payout predetermined by both parties and is deposited at the outset. Should a rating change trigger occur, the insured party will receive from this collateral the net change in the value of the reference bond at the time the CRS was issued and the market value the day after the rating change was announced. The risk to the party providing coverage against a downgrade is capped at the pre-arranged collateral, but could be less if the reduction in the bond's overall value is lower than the funds held in escrow. The mechanism is similar to the previously announced DelphX bond default process, but has smaller premiums and collateral, and a different trigger (downgrade rather than default).
"We designed the CRS product in response to a significant unmet need presented to us by major portfolio holders," explained DelphX CEO Patrick Wood. "There is no other product like this in the market, so today's announcement is also an open invitation for portfolio managers and traders to take a closer look at what the CRS can do to reduce risk and increase yield. The emphasis in the fixed income market has traditionally been on default protection, ignoring the financial impact of a bond's valuation timeline, which is typically marked by multiple downgrades on the journey to a default. Our CRS product gives portfolio managers the ability to pick spots along that duration timeline to add an extra layer of protection or speculation. It is important to remember that downgrades are far more common than defaults, as there 21 different levels on the rating scales. So, the transaction volume for this product could be far larger than similar default-oriented products, a plus for trading desks. Perhaps most importantly, this is the kind of tool that can help a portfolio manager sleep better at night - by removing an element of uncertainty from the valuation equation."
The Company will continue to provide updates as it continues to achieve additional milestones over coming weeks and months.
About DelphX Capital Markets Inc.
DelphX is a technology and financial services company focused on developing and distributing the next generation of structured products. Through its special purpose vehicle Quantem LLC, the Company enables fixed income dealers to offer new private placement securities that optimally transfer and diffuse credit risk, while allowing the enhancement of yield. The new DelphX securities will enable dealers and their qualified institutional investors (QIBs) accounts to competitively structure, sell and make markets in:
- Collateralized put options (CPOs) that provide secured default protection for underlying corporate, municipal and sovereign securities;
- Collateralized reference notes (CRNs) that enable credit investors to take on the default exposure of an underlying security in exchange for enhanced yield.
All CPOs and CRNs are fully collateralized and held in custody by BNY Mellon. CPOs and CRNs are proprietary products created and owned by DelphX Capital Markets.
For more information about DelphX, please visit https://delphx.com/
Mark Forney, Corporate Development
DelphX Capital Markets Inc.
This news release contains certain "forward-looking statements" including, without limitation, statements regarding the launch of the DelphX platform. Such forward-looking statements involve risks and uncertainties, both known and unknown, that may cause actual results or events to be materially different from those expressed or implied by such forward-looking statements, including but not limited to, business, economic and capital market conditions, regulatory uncertainties, and the demand for our products. The forward-looking statements in this news release are based on factors and assumptions regarding, among other things, the state of the capital markets, the ability of DelphX to successfully manage the risks inherent in pursuing business opportunities in the financial services industry, and the ability of DelphX to obtain qualified staff, equipment and services in a timely and cost-efficient manner to develop its business. Any forward-looking statement reflects information available to DelphX as of the date of this news release and, except as may be required by applicable laws, DelphX undertakes no intent or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or results or otherwise.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
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