ABB protection no longer available on a client-only basis

Credit protection on the debt of ABB is no longer available even on a client-only basis, major dealers said today.

The Swiss-Swedish engineering company, afflicted by poor earnings and spiralling asbestos claims in the US, had its debt downgraded debt one notch yesterday by rating agencies Moody’s and Standard & Poor's to Baa3/BBB+, both putting ABB on watch negative. This followed a profits warning by the group on Monday.

ABB shares, which closed down 62% to a record low of SFr2.05 in Zurich yesterday, fell a further 4.4% to SFr1.96 earlier today. Its bonds also fell sharply, leading to fears that the company could default if it fails to refinance $3.7 billion of debt due to be repaid over the next 12 months.

Following weak earnings releases in July and the forced resignation of chief executive Jorgen Centerman in September, credit protection on the company in the inter-dealer market has been unavailable since last month, when its five-year credit default swaps traded 1,000/1,400bp bid-offer.

“The name is pretty illiquid,” said one trader at a leading credit derivatives house in London today. “We’ve done some trades with our client base directly, but there is nothing out in the inter-dealer broker market, which is what you would expect for a security trading at this level,” he said.

He added that the bank was no longer offering ABB protection, even to its own clients.

Other names in the European industrial sector were also under pressure in the credit protection market, which traders described as “jittery” and “defensive”. Five-year protection for French industrial Lafarge's debt widened by 10bp to 140bp-mid yesterday, due to concerns it may also face costly damages from US asbestos claims.

However, traders said the credit markets were still firm despite nervous equity markets. Credit default swaps for auto benchmark DaimlerChrysler traded at 160bp-mid today, 40bp narrower than two weeks ago. Ford remained under pressure, but credit protection on the auto company’s debt is now trading at 570bp-mid, nearly 100bp tighter than two weeks ago.