Credit Markets Update: Spreads volatile in Fiat and France Telecom

Five-year credit protection levels for debt-heavy Italian industrial conglomerate Fiat bounced from 360 basis points-mid on Monday, to 405bp on Tuesday, to 355bp by today’s end, according to data from credit derivatives broker GFInet. Traders said the volatility was due to continuing uncertainty over plans to reduce the company’s net debts of €6.6 billion. Fiat’s spreads tightened today on the news that its three large Italian creditor banks – Banca di Roma, IntesaBCI and Sanpaolo IMI – were prepared to provide €3 billion in new capital under certain conditions, including an overhaul of top management.

"They [the banks] seem to be throwing them a lifeline, and that has put a positive basis on the spread," said one trader based in London. Credit turmoil for Fiat had widened five-year protection levels for US auto-maker General Motors from 110bp to 120bp by mid-day. The linkage is due to a deal General Motors struck with Fiat two years ago when it bought a 20% stake in Fiat Auto. As part of the deal, Fiat retains a put option to sell the remaining 80% of the unit to General Motors in 2004.

Another volatile European credit catching traders’ attention this week was debt-heavy France Telecom. On Tuesday it was reported that the French government, the company’s largest shareholder with a 54% stake, would not support a new rights issue. Five-year protection on France Telecom ended yesterday 15bp higher at 370bp-mid.

Today, credit markets rallied on rumours the company was considering a convertible bond issue. Spreads tightened 8bp to 362bp-mid by the end of the day. “We still don't know how France Telecom is going to repay this debt. Doing an equity offering would have been a great way around it, but if your largest equity owner isn't going to support that, then you've got to look elsewhere,” said Darren Reese, a credit derivatives manager at ING in London. Reese said spreads on France Telecom would probably be wider, but that overall positive market sentiment was buffering the impact of the company’s recent bad news.

Spreads also widened considerably today on mobile telecommunications company MM02, which reported disappointing performance in its core UK market. Five-year credit protection ended the day up 45bp at 415bp-mid.

Overall, European credit derivatives traders said spreads were down in the credit derivatives market due to a wave of buying from planned new CDOs, as well as cyclical economic factors.