Credit Markets Update: Spreads in Europe stay wide

Credit default swap spreads on European corporates continued to widen across the board this week, albeit at relatively more moderate levels than witnessed in the past few weeks. Traders said poor corporate earnings reports, negative rating actions and liquidity concerns continued to fuel a well-bid European market that saw healthy trading volumes during a prime holiday month.

Credit default swaps spreads have widened across a number of sectors in the past month. Credit protection on French building group Lafarge is up from 75/90 basis points to 120/140bp. In the retail sector, spreads on France’s Carrefour widened from 30/40bp to 40/60bp, with similar increases seen in the cost of protection for Kingfisher and Marks & Spencer, now trading at around 60/80bp and 40/60bp, respectively. And in automotives, protection on BMW, Volvo and Volkswagon has widened gradually by between 10-25bp over the past four weeks.

Ford reported its first monthly sales increase of the year last week, but despite the 1.5% increase, sales are down 9.1% in the year-to-date compared with the same period in 2001. Five-year credit protection on Ford widened 50bp this week to trade at 375bp today, and the widening caused a contagion effect. Credit protection on both DaimlerChrysler and General Motors was up 30bp to 180bp and 265bp respectively this week, amid fears that a continued weak US economy would hurt manufacturing sales.

In financials, the market continued to be well bid for Latin American exposed banks, including SCH and ABN Amro. “For protection on Santander you are now looking at over 100bp for the senior level, but the offers are drying up,” said one trader in London today. “There are just too many bids.”

Meanwhile, the US market retraced some of the across-the-board widening in spreads experienced in the prior weeks. Martin Gonzalez, a credit derivatives analyst at Banc of America Securities in New York, said credit markets were able to decouple from equity markets that continue to decline.

Spreads retracted on recently volatile names over the past week, including AOL Time Warner, which saw the cost of protection on its five-year debt come in 200bp to 625/725bp, and troubled energy companies Duke Capital and American Electric Power, which both narrowed 100bp to 350/400bp and 350/450bp respectively. Credit protection on JP Morgan Chase and Citigroup also cheapened, with five-year credit default swaps contracting by 10-25bp on senior debt to 85/95bp and 75/85bp respectively.

“Nonetheless, the default swap market continued to be characterised by extreme changes in day-to-day sentiment, and accordingly was prone to outsized spread movements on relatively modest trading volumes,” said Gonzalez in a structured credit products note.