France Telecom debt protection cost soars following downgrade

The cost of five-year credit protection on France Telecom debt widened by 100 basis points (bp) today as rating agency Moody’s cut its credit rating to one notch above 'junk'. Five-year credit default swaps were priced at 600/650bp in heavy trading.

Moody's lowered France Telecom's long-term rating to 'Baa3' from 'Baa1' and its short-term rating to 'P-3' from 'P-2'. The agency said it was concerned the former French phone monopoly would not be able to reduce its debt, and has maintained its negative outlook.

One-year credit protection is trading at 585/650bp with no real activity, said Matthew Johnson, a credit trader at ING in London. “Most of the action has been focused around the five-year [maturity] ... with trading quite frenetic,” he added. “Most participants are better buyers of the long end, and a number of bonds have had a coupon step-up triggered by the double downgrade, which has caused the activity this afternoon."

Last Thursday, spreads on France Telecom widened by about 50bp to 500bp-mid, as France Telecom said it had reached an agreement with banks on restructuring €4.7 billion ($4.46 billion) of Mobilcom debt. A telecoms analyst in London said France Telecom will now have an increased exposure to the German telco, which adds to negative ratings pressure.

Last week, other telecoms firms, such as Deutsche Telekom and British Telecom, traded around 310bp-mid and 100bp-mid respectively. But today the France Telecom news led to spread widening across the sector, with Deutsche Telekom rising by around 20bp.

Today Moody’s said credit rating downgrades have outnumbered upgrades by more than eight to one in Europe’s high-yield debt markets over the past 18 months. But the agency said greater stability could be emerging as the telecoms/cable sector, in particular, has largely bottomed out.

“Overall, telecoms/cable ratings have fallen to the point that there is only limited scope for further ratings downgrades in the sector,” said Karl Pettersen, a Moody’s analyst and author of a new report on rating trends in European leveraged finance.