Fitch: Strong U.S. CDS Performance Helps Drive FFI Higher
NEW YORK -- January 16, 2014
A pick-up in the Fitch Fundamentals Index (FFI) during fourth-quarter 2013 was
supported in part by significant tightening in credit default swap (CDS)
spreads, according to Fitch Ratings. The Fitch Solutions U.S. CDS Index
tightened by 14% to 118 bps during the quarter, as spreads improved in eight
out of 10 sectors in the index.
The largest quarterly CDS move was seen among technology companies where
spreads tightened 33%. Several factors contributed to tech spread changes.
Most notably, Hewlett-Packard (HP) delivered on its deleveraging plan,
reflected in the company's CDS spreads. HP CDS spreads widened significantly
in 2011 as the company engaged in high acquisition activity. However, during
2013, HP avoided accessing the debt markets entirely and instead paid down
more than $5 billion in maturities organically through free cash flow.
Improved credit quality was reflected in its November earnings.
Pitney Bowes also stood out as a strong CDS performer in the quarter. The
company cut its dividend and sold a noncore business with proceeds used to pay
down debt. Larger, stable names including Oracle, Intel and Microsoft also saw
narrowing spreads as investors continue to favor and seek out stronger
The consumer services sector improved by 28%, while the basic materials and
consumer goods sectors both tightened by 21% quarter over quarter.
Improvements were also notable in the telecommunications, industrials and oil
& gas sectors. However, utilities widened by 2%.
The healthcare sector was the main underperformer in the fourth quarter,
widening by 7%, as problems with the Affordable Care Act's roll-out escalated.
Investors continue to hedge against future losses on healthcare bonds as
uncertainty over the ultimate success of healthcare reform grows.
Some big moves in bank CDS spreads also helped drive the improvement in the
index. Wells Fargo and Morgan Stanley led the pack among financial
institutions in terms of quarterly tightening. Spreads for both of those
institutions tightened by 36% quarter over quarter.
The CDS Outlook subcomponent in the FFI moved into positive territory for
fourth-quarter 2013, helping push the aggregate FFI score to +2 from 0 in the
See the latest edition of the Fitch Fundamentals Index, dated Jan. 15, 2014,
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
Fitch Fundamentals Index
Brian Bertsch, +1-212-908-0549 (New York)
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