Credit Markets Update: Repsol spreads hit again over Argentina

The cost of protection on Spanish oil company Repsol YPF’s debt widened 50 basis points to 460bp/510bp today, in what traders described as a delayed market response to proposals last Thursday by the Argentine Commission of Energy to impose more government control on that country's oil industry.

Five-year credit default swaps on Repsol, which acquired Argentine energy company YPF in 1999, widened only 10bp to 410bp/460bp on Friday, immediately following news that the Argentine government planned to limit oil company profits. But as London markets re-opened following the extended public holiday, the cost of Repsol debt protection surged.

However, increased government intervention in the Argentine oil market was partly expected, said Roberto Pozzi, an energy credit analyst at Commerzbank Securities in London. “The fact that trading was thin contributed to the limited movement in credit protection on the name.” But a further widening of Repsol spreads is likely if the announced government proposals receive commission and parliamentary approval.

Repsol’s ratings were put on review for possible downgrade by Moody’s in April due to the company’s exposure to Argentina. Credit default swaps prices hit a high of 575bp/650bp on May 7, but tightened 100bp to around 400/450bp in mid-May when Repsol said it would boost its cash position by selling a large slice of its shareholding in Spanish energy company Gas Natural.

Elsewhere in Europe, the credit markets saw little movement today. But credit derivatives traders said spreads were holding due to the continuation of a wave of planned new CDO structures.

“Despite negative financials from some companies, which are pushing shares down, credit default swaps are unchanged,” said one trader in London today. This technical factor is keeping spreads tight, he said.

But the cost of credit protection for France Telecom widened 15bp to 20bp to 370/385bp today, indicating the teleco sector is still under pressure. “There was no real news on this name; there are fewer bids, and the offers are disappearing,” said one trader in London. “On the back of few trades, the movement could be completely artificial,” he added.