Europe Swaps Diverge as Default Concern Spreads: Credit Markets
Europe Swaps Diverge as Default Concern Spreads
Crispin Rodwell/Bloomberg
Contracts on Bank of Ireland and Allied Irish Banks Plc, Ireland’s biggest lenders, soared to records on doubts about the nation’s ability to refinance in the bond market.
Contracts on Bank of Ireland and Allied Irish Banks Plc, Ireland’s biggest lenders, soared to records on doubts about the nation’s ability to refinance in the bond market. Photographer: Crispin Rodwell/Bloomberg
Nov. 11 (Bloomberg) -- Irish central bank Governor Patrick Honohan talks with Bloomberg's Linda Yueh about the outlook for Ireland's return to bond markets in 2011 as the government steps up austerity measures to lower the budget deficit and restore investor confidence. They spoke at a conference in Dublin yesterday. (Excerpts. Source: Bloomberg)
Company bonds in Europe are the riskiest compared with U.S. securities since May as concern increases that the euro-region’s most indebted governments will need a bailout, further damaging the economy.
The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies climbed to 105 basis points this week, compared with 92 basis points for the Markit CDX North America Investment Grade Index. Contracts on Bank of Ireland and Allied Irish Banks Plc, Ireland’s biggest lenders, soared to records on doubts about the nation’s ability to refinance in the bond market.
European credit is being weighed down as governments struggle to convince investors they remain viable amid taxpayer resistance to budget cuts and after Goldman Sachs Group Inc. raised the prospect of Ireland and Portugal failing under the weight of “oversized” debt burdens. In the U.S., company debt is being helped by the Federal Reserve’s decision to buy an additional $600 billion of Treasuries to stoke the economy.
“The focus is back on peripheral Europe,” said Mark Dowding, a senior money manager at BlueBay Asset Management Plc in London, where he helps oversee $22 billion of investment- grade assets. “Keep your eye on Italy and Spain. If we see any weakness there, that’s what will drive weakness elsewhere.”
Companies and banks in Europe’s so-called peripheral countries saw the biggest jump in the price of credit-default swaps this month, according to CMA.
Banco Espirito
Contracts on Banco Espirito Santo SA, Portugal’s largest publicly traded bank by market value, rose the most in the Markit iTraxx Europe Index, climbing 125 basis points to 539.75, while energy company Energias de Portugal SA had the second- biggest increase, jumping 68 to 313.
Elsewhere in credit markets, OAO Gazprom, Russia’s largest company, hired banks to manage its first international bond sale of this year, while loans of Telefonica SA rose after the Spanish telecommunications firm reported a record quarterly profit. Walter Investment Management Corp. was said to be planning a $220.5 million issue of securities backed mainly by contracts used to finance residential construction.
Gazprom, the nation’s state-owned gas monopoly, hired JPMorgan and Credit Agricole SA to manage its bond issue, and will meet investors from Nov. 15 to Nov. 17, according to a banker with knowledge of the matter, who declined to be identified before a deal is announced.
Telefonica Loans
Telefonica’s term loans maturing in 2013 were quoted at a mid-price of 98.75 percent of face value, from 98.5 yesterday, according to WestLB AG prices. Europe’s second-largest phone company said today its third-quarter net income climbed to 5.06 billion euros ($6.95 billion), from 1.88 billion euros a year earlier, boosted by its gaining control of Brazil’s Vivo Participacoes SA.
Walter Investment’s sale of securities, backed by a $324.2 million pool of assets that also includes $61.2 million of residential mortgages, is being managed by Bank of America Corp., according to a person familiar with the transaction, who declined to be identified because terms aren’t public. Whitney Finch, a spokesman for Walter Investment, declined to comment.
JPMorgan Chase & Co. sold $1.75 billion of bonds yesterday. The bank’s 2.6 percent notes due January 2016 yield 140 basis points, or 1.4 percentage points, more than similar-maturity Treasuries, according to data compiled by Bloomberg.
The New York-based bank last sold fixed-rate five-year debt in June, issuing $1.25 billion of 3.4 percent senior unsecured notes at a spread of 130 basis points, Bloomberg data show. JPMorgan, the second-largest U.S. bank by assets, also sold $400 million of the securities in July, the data show.
Most-Traded Bonds
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate notes by dealers yesterday, with 172 trades of $1 million or more, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.
General Motors Co.’s AmeriCredit Financial Services and Nissan Motor Co. issued $1.45 billion of asset-backed debt tied to autos. Fort Worth, Texas-based AmeriCredit, the lender owned by GM, sold $700 million of bonds backed by auto loans, according to a person familiar with the sales. Nissan’s $750 million offering was tied to car leases.
Bond offerings tied to car purchases account for $58 billion of the $107 billion of debt linked to consumer and business lending issued this year, Bloomberg data show.
Nissan Sale
The largest top-rated portion of Nissan’s sale, a $223 million slice maturing in two years, yields 47 basis points more than the benchmark swap rate, according to a person familiar with the matter. AmeriCredit paid 55 basis points more than the swap rate on top-rated securities maturing in 2.12 years.
In emerging markets, the extra yield investors demand to own bonds rather than government debt widened 7 basis points to 237, according to JPMorgan index data.
Bonds from Banco Panamericano SA, the Brazilian lender controlled by media mogul Silvio Santos, tumbled as the central bank began probing accounting irregularities after a 2.5 billion reais ($1.5 billion) rescue. The yield on Panamericano’s 8.5 percent bonds due in 2020 soared 182 basis points, or 1.82 percentage points, to 9.22 percent, according to Trace.
Markit’s North American credit-swaps index, which investors use to hedge against losses or speculate on the creditworthiness of investment-grade debt, was little changed today at 90.4 basis points, according to index administrator Markit Group Ltd. Markit’s iTraxx Europe Index climbed 1.9 basis points to 105.1.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted securities. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Peripheral Fears
Speculation that Europe’s peripheral nations aren’t viable flared up earlier this year beginning with Greece, and returned as estimates of Irish bank losses increased and governments argued over a mechanism to prevent future financial crises.
Irish Central Bank Governor Patrick Honohan said that loan losses at the country’s lenders, including foreign-owned banks, total at least 85 billion euros. Irish lenders are wrestling with mounting bad debts after a decade-long real-estate boom ended.
“There isn’t a full appreciation in the bond markets of the amount of capital that has been put into banks,” Honohan told Bloomberg Television in an interview in Dublin yesterday.
Crisis Mechanism
German Chancellor Angela Merkel is leading the push for European Union treaties to be rewritten to create a permanent debt-crisis mechanism before an international loan package bailing out Greece expires in 2013. Portugal Finance Minister Fernando Teixeira dos Santos urged regulators yesterday to decide how the system will work, amid concern politicians’ calls for bondholders to share the cost of bailouts will drive up the cost of borrowing.
“It’s probable that the timing of the German proposals has amplified the underlying concerns surrounding the two peripheral EMU countries, Ireland and Portugal, with oversized debt relative to the domestic ability to roll it over,” Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, wrote in a Nov. 10 report.
Credit-default swaps on Ireland’s biggest lenders jumped by about half this month. Contracts tied to Bank of Ireland’s debt climbed to an all-time high of 744 basis points, from 510 on Oct. 29, while Allied Irish swaps rose to a record 1,025 from 645 at the end of last month, according to data provider CMA in London. Default swaps insuring the banks’ riskier subordinated debt soared yesterday to levels considered distressed.
Government Bonds
Sovereign debt concerns are also hurting European government bonds, with Irish 10-year notes tumbling for a 13th day, leading a rout from Portugal to Greece. The difference between Irish yields and benchmark German rates widened 33 basis points to a record 652, while the Portuguese-German spread expanded to an all-time high 474.
The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments including Germany, Italy and Spain surged to a record 179 today from 152 at the end of October.
Swaps on Irish bonds were little changed at 598, after climbing 20 basis points earlier today to a record 617, CMA prices show. Contracts on Portugal and Spain both jumped to all- time highs, before pulling back.
“Sovereign spreads have continued to move a lot wider and that’s been pressuring credit markets,” said Andrew Sheets, head of European credit strategy in London at Morgan Stanley. The focus has shifted “back toward sovereigns,” he said.
Corporate Spreads
The extra yield investors demand to hold company bonds in euros instead of benchmark government securities rose 10 basis points this month to 169, the highest in five weeks, according to Bank of America Merrill Lynch’s EMU Corporate index. Spreads in the U.S. tightened 2 basis points in the same period to 175.
Companies and banks in the U.S. are benefiting from a flood of cash after the Fed on Nov. 2 said it would pump more money into the economy by boosting bond purchases while keeping its key interest rate at close to zero, encouraging investors to snap up riskier assets to boost yields.
That’s also helping the neediest borrowers refinance debt. The European Central Bank signaled this month they will withdraw extraordinary stimulus measures.
Investor concern may next center on Italy, according to Bill Blain, a strategist at Matrix Corporate Capital LLP in London. “In Europe it’s the same old stuff” this week, he wrote in a research report dated Nov. 10. “Peripherals are wider and more pain.”
To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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