Credit Markets Update: Vivendi protection costs surge

Moody’s downgraded Vivendi to Ba1 from Baa3 late on Monday, while S&P cut the company’s rating to BBB- from BBB, with both agencies keeping the company’s debt ratings on review for further downgrade due to concerns about Vivendi’s ability to refinance its debt. Today, traders in London saw bids of up to 1,400bp on five-year protection.

Spreads on Vivendi have widened steadily during the past month to 575/675bp at the end of last week from 300/360bp four weeks earlier. After reporting a €13.6 billion loss in March, the company’s share price has also plummeted. On June 15, Bernard Arnault resigned from the executive board, and yesterday news broke that controversial chief executive Jean-Marie Messier would resign today.

Spreads on Vivendi Environnement widened 30bp to 140/175bp. Vivendi Universal owns 48% of Environnement. Spreads on other utilities Endesa, RWE, EdF and E.On widened 1-4bp, said a credit derivatives trader today.

Concern about European bank loan exposure to Vivendi Universal caused a widening in financial services default swap spreads. Spreads for French banks BNP Paribas and Société Générale were 12-15bp wider for senior protection, trading, at 28/33bp and 33/38bp today. The cost of credit protection on the senior debt for other financials was out roughly 5bp across the board, compounded by the WorldCom scandal and weak equity markets in addition to the Vivendi news. Spreads on major insurance names, including AXA, also widened to levels seen immediately following WorldCom’s admission of a major accounting fraud.

But the widening of five-year credit protection on Dutch bank ABN Amro’s debt was attributed to its exposure to Brazil. Fears of a devaluation in the real forced ABN’s spreads 10bp wider for senior debt protection to 27/33bp, and 20bp wider for subordinate debt protection to 67/72bp.

“ABN has the second largest exposure to Brazil after Santander,” said Brynn Lewis, a financials credit trader at JP Morgan Chase in London. Credit default swaps on ABN widened last week following turmoil in Brazil coupled with the WorldCom scandal. “After coming in slightly at the end of last week, they’ve surged out again as Brazilian bonds have slumped,” added Lewis.

Telcos suppliers Ericsson and Alcatel also saw a widening in default spreads. Five-year credit protection on Ericsson traded as high as 1,400bp-mid and Alcatel saw spreads reaching 1250/1500bp, both 300bp wider this week, according to Matt Chauvel, a credit trader at ABN Amro in London. “France Tel and Deutsche Tel have been placed on the backburner today, but there are concerns that Alcatel may be cut to junk,” said Chauvel. “This is chaos with thin markets, the equities are looking ugly and we don’t expect much of an improvement in the next few days,” he added.

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