Credit Markets Update: Vivendi and Alcatel protection still available

In the latest in a string of bad news, Moody’s cut telco equipment maker Alcatel’s debt rating to non-investment grade yesterday. Alactel had issued a profit warning two weeks ago, but credit analysts at Commerzbank Securities in London said the credit agency has adopted a more aggressive stance than anticipated. Meanwhile, French regulators are investigating accounting irregularities at media company Vivendi Universal, which has been plagued by a series of credit downgrades.

“There are still trades going through at a wide bid/offer spread,” said one London-based head of credit trading. Credit protection on Alactel is trading on an upfront basis of at least 25%. Its curve was heavily inverted, with five-year protection trading at 1,500/2,500bp. The cost of credit protection for industry companion, Ericsson, was at a similar level, but otherwise contagion did not spread to the wider telecom, media and technology sector.

While equities across Europe are trading back at September 11 levels, spreads are not at their widest, said the trader. “People are revising their downwards profits expectations, which are hitting equities hard, but these companies still have enough money to service their debt,” he said. “Share trading is taking a much harder hit and protection is relatively cheap compared with equity.”

Standard & Poor's credit analyst, Guy Deslondes, said today’s announcement by Vivendi that it has reached an agreement with a bank syndicate for a €1 billion ($993,000) unsecured credit line is viewed as a first important refinancing step. “The investment grade ratings on Vivendi Universal continue to assume that the group will rapidly improve its liquidity position,” he said.

Deutsche Telekom credit default spreads contracted this week due to news that it was looking to dispose of its IT unit, which could potentially raise up to $6 billion. Five-year credit default swaps on DT came in 30bp to 320bp-mid.

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