UFJ spreads balloon by 160bp due to nationalisation fears

The cost of credit protection on Japanese bank UFJ’s five-year senior debt rose by 160 basis points today as fears grew that the bank would be hardest hit by Japan’s planned banking restructuring.

UFJ is considered to have the worst-quality borrowers in its loan portfolio out of any of the major Japanese banks. Fears that the government may be forced to nationalise the bank caused UFJ’s share price to fall below ¥100,000 today, after the shares had already dropped by 15.2% on Thursday to ¥112,000. Prices in UFJ cash bonds also slumped and cost of protection on its debt widened to a bid-offer spread of 200-240bp today, from a spread of 45bp-mid earlier this week.

In its Thursday edition, the UK’s Times newspaper reported Hiroshi Okuda, chairman of Japan’s Keidanren industrial association, as saying that one of Japan’s four big banks will probably be nationalised as a result of deteriorating borrowers’ credit quality. Okuda later denied the statement but the denial failed to reassure markets.

Credit default swap spreads for the debt of other Japanese banks also widened. Mizuho, which is also considered to have a fragile borrower portfolio, saw its credit default swap spread widen by about 30bp to 200-225bp. Sumitomo Mitsui Banking Corporation's credit protection was trading at bid-offer spreads of 110-140bp today, 20bp wider than last week.

The wide bid-offer spreads continued to reflect the limited liquidity in the market, said one trader. “Hedge funds have been quiet [and] winding down,” said a trader, explaining that hedge funds were preparing to close their books for the year-end. “There’s not much reason to take a position at this point of the year,” he said.

But there was some activity in Fujitsu’s credit derivatives. “There was some interest in buying protection on Fujitsu’s convertible bond,” said another trader. Five-year protection on Fujitsu debt was quoted at 238bp, from 220bp last Friday.