Credit Markets Update: Key investment grade names see sharp widening

The cost of protection on a number of European investment-grade names, including France Telecom, Fiat and Repsol, remained high on the credit derivatives market this week, as their spreads widened to more than 400 basis points.

The cost of protection on France Telecom debt widened after a series of negative credit rating announcements. On Monday, Moody’s placed the Prime-2 short-term rating for France Telecom debt on review for downgrade. The rating agency would continue to review its Baa1 long-term ratings. Rival Standard And Poor’s said France Telecom would remain on creditwatch but indicated any long-term rating downgrade would be limited to one notch.

France Telecom five-year credit default swaps widened by 20bp to 380bp-mid, and traded as high as 395bp on Tuesday according to traders in London. Telecom analysts at Commerzbank in London predicted the French telco would eventually be downgraded at Baa3/BBB-.

The cost of Fiat debt protection widened another 50bp to 465bp yesterday as the auto company posted worse-than-expected operating losses for Q1. Standard and Poor’s put the 'A-3' short-term corporate credit rating on the Italian-based automotive group on creditwatch with negative implications, and extended that yesterday after Fiat unveiled plans to raise equity capital for its luxury car unit Ferrari by the end of 2002. The move is part of Fiat's efforts to halve its €6 billion ($5.4 billion) net debt.

Protection on Spanish energy company Repsol, despite coming in over 100bp over the last two days to regain liquidity, saw a wide bid/offer spread of 75bp/575bp today.

"We are seeing differences in remuneration of up to 100bp on so-called good and bad-names that are triple-B rated and above," said one trader in London today. Some names have fallen out of favour, which is pushing up their cost of protection in the credit default swap market regardless of the ratings, he said.

Spreads on Deutsche Telekom also widened 20bp to 225bp/245bp yesterday, but contracted back to earlier levels today. British Telecom credit default swap spreads widened a few basis points yesterday to 100bp/115bp, but traded tighter today at 95bp-mid. Other names saw a tightening in spreads today following a price rally on US equity market Nasdaq. “The market is in a better tone today,” said Antonio Diflumeri, head of credit derivatives trading desk at Deutsche Bank in London.