NEW YORK, Nov 20 (Reuters) - Sellers of protection on CIT Group Inc's bonds will need to pay buyers 31.88 percent of the insurance they sold, after an auction was held on Friday to set a value for the company's credit default swaps.
CDSs on CIT's bonds are worth 68.12 cents on the dollar, said auction administrators Creditex and Markit.
That means buyers of protection will be paid $3.18 million per $10 million of insurance they held on the commercial lender. When a borrower defaults on their debt, the protection seller pays the buyer the full sum insured, minus the recovery amount.
Friday's CIT auction is the largest the CDS market has seen to date, with net volume of more than $6 billion outstanding on the company's debt. Payments on the contracts were triggered when CIT earlier this month filed for a prepackaged bankruptcy.
CIT was commonly included in collateralized debt obligations, leading to speculation that demand to buy bonds to hedge these positions could drive up the ultimate value of the CDSs in the auction.
Countering this bid, however, was likely a prominent number of investors who held CIT's bonds and also owned CDS protection. These investors were expected to be large sellers of bonds in the auction.
Orders to sell the debt were almost double those to buy, at $1.5 billion and $785 million, respectively.

(Reporting by Karen Brettell; Editing by Padraic Cassidy) Keywords: CIT SWAPS/AUCTION (karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net )

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