Japan Credit Market Update: Fujitsu and bank spreads hit in tighter general market

Fujitsu five-year credit default swaps received some relief earlier this week, after the market digested the company’s credit rating downgrade by Standard & Poor’s to triple-B-minus last Friday. But this was shortlived, as a new scandal emerged on Tuesday when Fujitsu filed a complaint with police saying it was being blackmailed by a party that had threatened to release confidential information about a military computer system the company worked on for Japan’s Defense Agency.

The security breach means Fujitsu could be cut off from future Defense Agency contracts and caused a serious dent in market confidence in the computer maker. A large number of market participants hedged their credit exposure on Fujitsu’s convertible bonds, with the cost of credit protection on Fujitsu's five-year debt surging to 270bp on Thursday.

One trader said nervousness about Fujitsu was likely to have been exacerbated by the company's sale of ¥250 billion of convertible bonds in May – the largest Euroyen convertible issue from Japan.

Fujitsu's credit default swap spreads recovered by Friday, tightening to 230bp, but still remained wider than last Friday’s 220bp level.

The swaps on Japanese banks were on average 5bp wider this week due to continued concern about Japan's economic outlook and bank non-performing loans. Protection on Bank of Tokyo-Mitsubishi, for instance, was quoted at 90bp.

In the rest of the market, spreads were generally tighter due to the rebound in global equity markets which helped credit markets in Europe and the US.There was a “broad-based pull back” in spreads this week, said a trader, after several weeks of steady widening. The recent sell-off on Japanese equity markets had an adverse effect on credit derivatives, as the weaker stocks affected market perception of credit risk on those companies.

“The credit derivatives market has been driven by the Nikkei and the perceived effect on domestic risk appetite,” the trader said. The Nikkei 225 average index was at 9,999.79 late Friday, compared with about 9,681 a week ago.

Another trader said recent market nervousness was overdone, offering participants the chance to enter into some opportunistic strategies, “getting long on protection at attractive levels".

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