Credit Markets Update: Spreads on Iberian names widen due to Brazil fears

The cost of protection on a number of Iberian companies' debt widened this week, due to concerns that further pressure in the Brazilian financial markets and the fall of the real could leave Iberian corporates exposed.

The Brazilian currency has lost about 10% of its value so far this week. Remarks made over the weekend by US Treasury secretary Paul O'Neill implying Brazil faced similar problems as Argentina exacerbated the situation.

Five-year credit default swaps on Spanish power producer Endesa widened 90 basis points, after S&P revised its outlook on the company to negative on Monday. The agency said the decision reflected the economic and political deterioration in the Latin American region, where the group derived 43% of its ebitda in the second quarter. Today, protection for Endesa was trading around 200bp.

Credit default swaps on Telefonica and Portugal Telecom hit new peak levels due to Brazilian exposure fears. This morning, credit protection was trading at 225/245bp for Telefonica – up 40bp from its close on Friday. Portugal Telecom traded at 155/175bp today.

The cost of protection also widened for Portugal's largest utility group, Electricidade de Portugal (EDP), bid at 95bp compared with 62bp at the end of last week.

Troubled Spanish energy company Repsol, which unveiled a significant reduction in debt during yesterday's Q2 results, failed to bring in the cost of its credit protection. Five-year credit protection traded today at 474/575bp. “Repsol protection has traded higher in recent weeks, but we should have expected spreads to come in on this news,” said one credit derivatives trader in London today. “The Latin American worries are clearly affecting the prices.”

Iberian banks were also under pressures with subordinate protection widening by 10-15bp. Subordinate protection for Santander and Banco Comercial Portugues was most affected, trading 20bp wider today at 140/200bp and 75/100bp respectively. ABN Amro, BBVA and the UK's HSBC were thought to have more limited exposure, said another trader. “But with ongoing devaluation fears, further spread volatility is expected,” he added. “Buyers of subordinate protection are taking a position in these credits in the expectation that they will widen."

Overall in Europe, traders noted a consistent level of bidding. “Despite the stock market rally at the start of the week, there are still a lot of people out there looking for protection,” one trader commented. “The gapping has ground to a halt, but it has not yet gapped back in.”