Credit Markets Update: Spreads widen on weak earnings and equity news

Most of the activity in the credit derivatives markets was again seen in the volatile telecoms sector, with five-year spreads on UK telco mm02 widening by around 20 basis points to 440bp/460bp following weak earnings results on Tuesday, which caused its share price to fall by as much as 16%.

The protection cost of debt held in another British mobile phone operator, Vodafone, rose marginally following the company's record losses, announced on Tuesday. Vodafone's five-year default spreads widened 5bp to 85bp/95bp, as the market had already factored in a poor earnings performance.

There was strong buying of Swedish mobile phone company Ericsson debt protection, as its five-year spreads widened 40bp to 480bp/520bp. A London-based trader said he had seen large amounts of hedging activity on the name.

In the media sector, news that Vivendi Universal planned to reduce its 63% holding in water subsidiary Vivendi Environment to 43% early this week led to a 50bp contraction in its five-year spreads to 300/320bp. Vivendi was also removed from rating agency Moody’s trigger list - a list of the most vulnerable firms in the market.

Meanwhile, Moody's downgrade of Japan's sovereign credit rating by two notches to A2 caused 10-year default spreads on that country to widen around 2bp to 38/42bp. The widening was not greater due to the market already being short on Japanese protection, said Iftikhar Ali, head of single-name credit trading at Schroder Salomon Smith Barney in London. “There is nothing else out there to buy,” he said.