Credit Markets Update: Spreads widen on US telecoms woes

The cost of credit derivatives protection rose on a number of telecoms today following the resignation yesterday of WorldCom chief executive Bernard Ebbers and a wider than expected $698 million loss in the first quarter reported by Qwest.

According to John Piluso, a credit derivatives trader at GFInet in New York, Qwest and WorldCom were seeing bids of up to 1,100 basis points and 1,200bp above Libor today, with no offers in the market. Yesterday bids on WorldCom had been as high as 2,000bp.

Fellow US telecom AT&T saw spreads widen with bids of 580bp today, up 150bp from yesterday and compared with 290bp/317bp at close in New York last Friday. Trading volumes were said to be high. “People are fast buying up protection on telecoms today on the back of WorldCom and Qwest,” said Piluso.

“While the morning was quiet in Europe, when the US markets opened there was a massive widening on telecoms,” said Pierre Mathieu, head of European credit derivatives flow trading at BNP Paribas in London. France Telecom was trading at 350bp/70bp today, up 50bp from yesterday, while the five-year cost of protection on Deutsche Telecom widened by 55bp to 240bp/50bp.

other sectors also suffered, with autos seeing a general widening of 3/4bp. Daimler Chrysler saw spreads widen 10bp today to 130bp/140bp, and Volvo traded at 71bp/75bp, up 12bp on yesterday.

Spreads have been tight for a while on the back of an increased rate of CDO issuance, said Mathieu. “Now the market has become very liquid and bad news is prompting a widening of spreads,” he said.

Another credit derivatives trader in London said he believed the widening was led by negative sentiment on US telecoms, with Europe widening in sympathy rather than any technical factors.

Vladlen Andriouchtchenko, a telecoms credit research analyst at Commerzbank in London, agreed. The widening of the cost of protection on names such as France Telecom and Deutsche Telecom reflect the declining market share and cashflow questions at major US telecoms, he said. The pressure on US credits and equity volatilty in general is impacting trading sentiment in Europe.