Credit Markets Update: France Telecom fluctuates in thin markets

The cost of credit protection on troubled telco France Telecom fluctuated this week within a 100 basis point range, causing knock-on effects on the spreads of other European telecoms in jittery markets that saw little trading activity. But positive sentiment sparked by a strong performance in North America on Wednesday, followed by quiet markets due to the Independence Day public holiday in the US, brought European spreads in tighter towards the end of the week.

France Telecom released new details of its liabilities on Wednesday, indicating that no decision has yet been made on MobilCom and a final agreement with all of its creditors has not yet been reached. France Telecom five-year credit default swap spreads widened on Wednesday by 40bp, but closed unchanged at 600bp-mid.

Other European telecoms, BT, KPN, Telecom Italia, Deutsche Telekom and Vodafone widened between 10bp and 40bp mid-week, according to one London-based credit trader. But by Thursday spreads were narrowing to previous levels. Five-year credit default swaps on France Tel narrowed to 540bp-mid following rumours the French government may back a bond issue or loans related to the company. “These are thin markets which tend to move on any market gossip, but unless the government confirms the rumour, spreads on France Tel could easily widen out again,” the trader added.

Stephen Mills, head of credit trading at Bank of America in London, agreed: “It’s been a slow market following the July 4 holiday, with little coming out of the US, and in Europe the equity markets have continued to rally," he said. "And in credit default swap land, this has pulled bids back.”

Moody's placed the Aaa rating of Electricite de France on review for possible downgrade on Thursday, which pushed the spreads only two to three basis points wider on five-year protection, which traded at 50/60bp. And spreads on Italian auto Fiat were out from 470bp bid yesterday, trading at 525/575bp as concerns that the credit may soon gain ‘junk’ status continued, said Mills. But overall, the markets were quiet for European autos and utilities, with spreads coming in 2-3bp following higher pricing earlier in the week due to the Vivendi fall-out (see mid-week report).

But volatility in the credit markets for telecoms equipment makers continued. Alcatel was placed on negative watch for its short-term rating a week ago by Standard and Poor’s, following a profits warning. This week, fears continued that Alcatel might be downgraded to non-investment grade. “It’s already viewed at that level in the CDS [credit default swap] market, with spreads trading at over 1,200bp,” said another London-based credit trader. Fellow telco Ericsson has seen spreads at a similar level.

Vivendi remained bid at 1,350bp for five-year protection with its credit default swap term structure inverted. One-year protection has surged to bids of 2,000bp while 10-year protection has trading at around 1,100bp.