Credit markets update: financial sector spreads widen in heavy trading

Spreads in the insurance sector widened between 10-30 basis points (bp) as concerns over capital adequacy increased. Five-year credit protection for senior and subordinate debt for a number of European banks was also volatile.

“Although weak equity markets have been an issue for insurance companies for the last six or seven months, it has come to a new head this week because of the slump in equities,” said one insurance market analyst in London. Spreads were also impacted following news that the UK’s regulator, the Financial Services Authority (FSA), is monitoring the life assurance sector and its solvency levels, she added. FSA chairman, Sir Howard Davies, acknowledged concerns following the recent sharp falls in equity markets on Tuesday, in an interview with the BBC.

Spreads on subordinate debt for insurers Scottish Mutual, CGNU and Prudential were 10bp to 30bp wider than levels on Wednesday. Subordinate five-year protection on AXA – the most liquid name - widened 15bp over the past couple of days and was bid at 75bp today.

Spreads were also under pressure this week for Spanish bank Santander Central Hispano, due to its exposure to Brazil. Five-year senior debt protection moved out 15bp from 25/30bp to 40/45bp, while its subordinate protection widened 30bp to 90/100bp. A credit trader in London said the surge followed the battering of Brazil's financial markets yesterday, due to mounting fears of a left-wing victory in the country’s October election.

Banks were also under pressure following a negative rating change by Moody’s yesterday on Commerzbank. The German bank suffered a financial strength downgrade from C+ to C causing its senior debt protection to rise from 27/31bp to 30/35bp today. A negative ratings review placed on the Aa3 senior-debt ratings for HVB group did not cause a notable change in spreads, as the market has largely factored in an imminent downgrade, dealers said. But traders added that, given the current nervous markets, spreads on HVB and other financial credits could widen.

Credit default swaps for European banks ABN Amro, BBVA, BNP and Deutsche Bank widened between 1-3bp and 2-7bp for senior and subordinated debt, respectively, during the latter part of the week.

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