Credit Markets Update: Spreads widen on ABN Amro subordinate debt

The cost of five-year subordinate credit protection on ABN Amro widened several basis points to 38bp-mid as bond-holders bought protection after Moody's placed its Aa subordinate debt rating on negative review on Wednesday.

The review caused problems for collateralised debt obligation managers that require Aa ratings on their baskets of underlying securities, said a credit derivatives trader in London today. “A downgrade to A would remove ABN Amro's sub as a candidate for inclusion in the future,” he added. The market saw a lot of buyers of ABN subordinate debt protection seeing volumes of about €40 million yesterday, estimated a trader at JP Morgan Chase. Five-year credit default swaps on ABN’s senior debt widened only 1bp to 18bp-mid yesterday.

Credit protection on Standard Chartered debt also widened yesterday. Five-year credit protection on its subordinate debt rose from 60bp/65bp to 68bp/73bp. Credit derivatives dealers said no trades were seen on senior five-year credit default swaps. The London-based Bank, which derives much of its revenues from Asia, is under pressure due to the escalating military stand-off in Kashmir.

Meanwhile, Deutsche Telekom five-year credit default swap spreads widened 20bp after Moody’s changed its credit outlook to negative from stable due to disappointing Q1 results on Wednesday. Telekom spreads contracted earlier in the week due to rumours of significant over-subscription and tighter pricing of its €5 billion bond issue.

"Deutsche Telekom may decide to change the pricing of its bond yet again, and the ongoing execution risk of the bond sale means its spreads are expected to remain volatile," said a telecoms analyst in London.

The cost of credit protection on fellow European telecoms British Telecom, Telecom Italia and Olivetti were stable, but credit default swaps on France Telecom widened 10-12bp to 380bp-mid.