Parmalat CDS spreads hit 47% after six-notch S&P downgrade

The cost of five-year credit protection on debt issued by Parmalat closed at 4,000bp/4,300bp above Libor today after rating agency Standard and Poor’s (S&P) cut the Italian dairy company’s credit rating to 'C' – its second-lowest rating.

Parmalat, last week a 'BBB' investment-grade company, was due to repay a €150 million bond that matured on Monday. But it has failed to pay - or confirm how it will find the money to pay - the amount before a deadline of December 15, the end of a five-day grace period.

On December 5, Parmalat had presented information to S&P that implied it would be in a position to make the payment. This is now in question, with a credit derivatives trader at a leading European investment bank saying “there is a very, very high risk of a credit event”.

S&P has downgraded Parmalat by six notches since the start of the week. And the credit rating agency said it would lower Parmalat’s rating to a 'D' if the company failed to make the payment at the end of the grace period.

Buyers of credit protection on Parmalat debt can only do so on an ‘up-front’ basis, said traders. This means all payments are made to the protection seller at the time of purchase, rather than the buyer paying a coupon on the bond every three months until maturity or default. This only occurs when companies enter severely distressed conditions. It is aimed at reducing risk for the protection sellers.

Parmalat spreads were as wide as 4,700bp over Libor today, but narrowed before the market closed in London. Traders were unsure why the spreads contracted late in the day, but the move followed a conference call to analysts by S&P.

Parmalat’s problems began when news leaked that it had failed to liquidate a $590 million investment in the Cayman Islands-based based Epicurum fund.