Credit Markets Update: HVB spreads up on Kirch and other concerns

Subordinate protection costs on Munich-based HypoVereinsbank (HVB) surged 12 basis points briefly today, as it became the latest financial institution dragged into Kirch Media's bankruptcy. Within 30 minutes of trading, senior protection on HVB traded at 30bp/32bp in the five-year, with subordinate protection trading at 65bp/68bp; compared with 24bp/29bp and 53bp/63bp at yesterday’s close.

HVB, Commerzbank, DZ Bank and Bayerische Landesbank are the main lenders to KirchMedia. They have now agreed to create a new company to take over Kirch's assets, but there are still fears about overall exposure levels.

Costas Katsileros, a credit derivatives trader at ABN Amro in London, said renewed rumours that HVB would increase its stake in Commerzbank, as reported in the Wall Street Journal this morning, plus an equity ratings downgrade by ING Barings to underweight, also contributed to HVB’s woes. Commerzbank spreads also increased to 30bp for senior protection and 60bp on subordinate protection in the five-year.

Mark Timmis, head of credit derivatives at Credit Suisse First Boston in London, said a ruling by Germany’s highest civil court today that German banks may have to repay interest on mortgages sold door-to-door also contributed to the widening of German bank default spreads. The ruling follows a similar decision by the European Court of Justice last December.

But after initial alarm, spreads tightened on HVB senior protection to 26bp/30bp, with subordinate at 55bp/64bp. A major European credit derivatives player was believed to have sold heavily during the market highs, although traders declined to name the institution. Timmis said spreads on other German banks like Deutsche Bank and Dresdner Kleinwort Wasserstein held firm throughout the day.

Protection on telecoms like Worldcom, Qwest and Nortel Networks remained under the spotlight. “All eyes are on the telecoms sector,” Matthew Johnson, a trader at ING Barings in London told RiskNews. Other big movers were Alcatel and Ericsson, which saw spreads increase 30bp on the day. Both were trading up at 360bp mid in the five-year, due to fear over future handset sales, said Johnson.

But credit default protection on Deutsche Telekom and France Telecom saw little movement. Deutsche Telekom traded today at 150bp/160bp, having risen only a couple of basis points over the week; while France Telecom was stable at 240bp mid.

“The stability on these telecoms was surprising,” said Katsileros. Spread widening was expected following a downgrade by Moody's on Nortel Networks to ‘junk’ last week, Deutsche Telekom’s talks with banks on new bond issuance and downgrades by Merrill Lynch on both Deutsche Telekom and France Telecom on Monday.

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