LONDON, Nov 6 (Reuters) - The first stage of an auction to settle credit default swaps on the senior debt of Icelandic bank Kaupthing set a preliminary price at 5.625 percent of notional value, higher than cash bond prices.
This is the third ever European CDS cash settlement auction, following the first for Landsbanki on Tuesday and Glitnir on Wednesday.
The inside market midpoint was calculated from bids and offers submitted by 14 dealers on Thursday, auction administrators Markit and Creditex said. It is an indication that sellers of protection may have losses of more than 94 percent.
By comparison, Kaupthing senior bonds were bid at 2 percent of par value and offered at 3 percent.
The auction set net open interest at 974 million euros ($1.3 billion), with demand to sell physical bonds outstripping the demand to buy.
Later in the day, the inside market midpoint for Kaupthing subordinated bonds was set at 1.375 percent. That compares with its subordinated bonds, which were bid at 0.5 percent and offered at 4.5 percent of par value earlier this week.
Net open interest was 11 million euros to sell bonds.
Some investors prefer physical settlement to protect themselves from any difference between bond prices and the final auction price.
The last stage of the auction later on Thursday will fix the final price by matching the open interest with limit bids to reach the level at which all open interest is met.
The fact that open interest is on the sell side indicates that the final price may be lower than the inside market midpoint.
Auction administrators Markit and Creditex are set to announce the final settlement price for Kaupthing senior debt at 1400 GMT and for its subordinated debt at 1545 GMT.
(Reporting by Jane Baird and Natalie Harrison) ($1=.7759 Euro) Keywords: KAUPTHING CDS/AUCTION

(jane.baird@reuters.com, Reuters Messaging: jane.baird.reuters.com@reuters.net, +442075422471)

COPYRIGHT

Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.