Credit protection for European telecoms continues to tighten

The cost of credit protection for European telecoms continued to tighten this week, led by France Telecom and boosted by an S&P upgrade for the Netherlands' KPN yesterday. Elsewhere in Europe, spreads remained tight with little movement, including those of European banks HSBC, Société Généralé and BNP Paribas, which all issued new bonds yesterday.

France Telecom laid out concrete debt restructuring plans in a strategic review yesterday, including a €15 billion rescheduling of debt repayments and a €9 billion subordinated bridge loan from the French government. The cost of protection for France Telecom debt came in 15 to 20 basis points over the week, trading at 275/285bp today, with both buyers and seller trading actively. One London-based credit derivatives trader said the review was in line with expectations. “The ‘good’ news was certainly still there, but no ‘new good’ news to pull spreads in tighter,” he said.

KPN’s upgrade to BBB-stable by rating agency Standard & Poor's had a more marked reaction in the credit default swap markets. Five-year credit protection tightened 15bp on KPN debt to 155bp-mid. The cost of protection for other European telecoms remained tight. Deutsche Telekom and BT Group were priced at 210bp-mid and 85bp-mid respectively.

Otherwise, the European credit derivatives market remained relatively listless. The ratings outlook on Siemens was revised to negative by Moody’s yesterday, which cited underperformance and weak profitability as concerns. Five-year credit default swaps for Siemens were quoted at 45/59bp, relatively unchanged.

New issues from European banks also failed to affect credit protection spreads. Yesterday, HSBC tapped the dollar market with a €1.4 billion, 10-year global bond issue, joined by a €1.5 billion 10-year deal from BNP and a €600 million deal from Société Généralé. Bond issues can cause the cost of credit protection to widen as buyers of the bond seek additional protection and drive prices wider. However, spreads for the European Banks remained stable, with BNP still priced very tight at 19/16bp for senior protection.

“The issues weren’t large enough, and were not on names that are controversial enough to push those spreads wider,” said another trader. “In European financials, spreads on names such as Allianz, which has also recently made new issues in recent weeks, are actually now trading tighter as the market as a whole winds in,” he added. Credit default swaps for Allianz were priced at 48/55bp today, about 8bp tighter than at the start of the week.