Credit Markets Update: Williams hit due to energy investigation

Continued federal enquiries and a credit downgrade for US energy trader and gas pipeline operator Williams caused five-year debt protection spreads on the company to widen a further 30 basis points this week, after its spreads swelled 200bp last week and its credit default swaps curve inverted.

Last week Williams default swaps closed at 700bp/800bp after the Federal Energy Regulatory Commission (Ferc) threatened to revoke the power trading licences of Williams and fellow energy traders Avisat, Portland General Electric and El Paso. Williams said last Wednesday it would provide gas trading data to a Ferc investigation into market price manipulation in California during the winter of 2000/1.

Moody’s cut Williams’ senior unsecured debt rating to Baa3 with a negative outlook, one notch above junk, on Friday. Five-year credit protection on Williams traded at 730bp/825bp today.

While there is no credit protection available on Avisat and Portland General, El Paso saw its spreads widen by about 75bp to 100bp last week, but then retrace to end at 340bp/390bp – only 10-30bp wider on the week. “El Paso has held in there, but the downgrade has crushed Williams, and it’s in danger of being downgraded again,” said Chase Van Der Rhoer, head of credit derivatives trading at ABN Amro in New York. “And its [curve has] inverted because there are a lot of short-term financing worries.”

Van Der Rhoer said credit protection spreads on US energy companies such as Williams, Excel Energy, El Paso and Dynergy have risen 200bp higher over the past two months.

In Europe, credit default swap spreads on troubled Italian auto maker Fiat narrowed 45bp yesterday following the resignation of chief executive Paolo Cantarella on Monday. His departure coincided with a confirmation that Standard and Poor’s would maintain Fiat’s short-term debt rating at A3. The cost of five-year protection on Fiat came in to 320bp-mid from 365bp-mid.

Fiat’s five-year credit default swaps widened 120bp to 370bp-mid since S&P placed its credit rating on CreditWatch-Negative in April. In a bid to manage its €6.6 billion net debt and avoid a downgrade, Fiat embarked on a big disposal programme and restructured a €3 billion bank loan.

A credit derivatives trader in London said Cantarella’s departure could reassure investors and creditors that would like to see further restructuring action. “We expect the spread to recover to its pre-CreditWatch level,” he said.

Spreads on France Telecom also narrowed 20bp yesterday after the French telecoms company ended a legal co-operation pact with Germany’s MobilCom and its chief executive Gerhard Schmid. Five-year credit default swaps on France Telecom closed yesterday at 390bp-mid. France Telecom alleged it had clear legal grounds to end the agreement because of a series of breaches of the agreement by Schmid and MobilCom that denied the French company the right to approve key strategic decisions.

Credit protection on France Telecom widened back to 395bp/410bp today. A credit derivatives trader in London said future volatility in France Telecom spreads was likely due to uncertainties over whether the telco can escape its financing obligation to MobilCom. “France Tel will try and get a good deal with the banks, but we’ll have to wait and see,” he said.

Meanwhile spreads on Nokia fluctuated as the company made a downward revision of its sales forecast for Q2. The cost of five-year credit protection widened 5bp to 75bp/85bp, but came back in today.

But the Nokia announcement on its deteriorating market outlook in the network division and its increasing market share in the handset business had negative implications for Ericsson. “We’ve seen bids of up to 600bp on Ericsson today,” said Guy America, head of corporate credit trading at JP Morgan Chase in London. Credit default swaps on Ericsson are trading 40bp wider since yesterday morning.