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Europe’s $180 Billion of Maturities Lifts Swaps: Credit Markets

Europe’s $180 Billion of Maturities Lifts Swaps
Italian carmaker Fiat SpA paid a yield of 677 basis points more than the benchmark mid-swap rate when it sold 600 million euros ($737 million) of 7.75 percent bonds due October 2016 on July 11. Photographer: Nelson Ching/Bloomberg

Speculative-grade corporate debt in Europe is the most expensive to insure against losses in 1 1/2 years relative to sovereign bonds as companies need to refinance as much as $180 billion of debt by 2014.

An index of credit-default swaps on junk-rated European companies exceeds one for government bonds by 2.44 times, up from 1.65 in March, according to data compiled by Bloomberg. Finnish mobile-phone manufacturer Nokia Oyj led the increase among European non-financial companies, with a 136 percent jump in the last three months, followed by Rome-based toll-highway operator Atlantia SpA, whose swaps climbed 72 percent.

Borrowers in Europe, the Middle East and Africa face $84 billion of junk-rated debt maturing next year and $96 billion in 2014, compared with 2011’s record bond sales of $70 billion, Moody’s Investors Service said. Their ability to service debt is being hurt by the worsening economic outlook, with the International Monetary Fund forecasting July 16 that output will shrink 0.3 percent in the euro area this year.

“The problems now are for peripheral corporates,” said Nicolo Bocchin, a money manager at Aletti Gestielle SGR SpA in Milan. “It is very difficult to access the market.”

The divergence between high-yield corporate and government default risk is being exacerbated by investors snapping up bonds of the safest sovereigns, in some cases agreeing to pay to lend to the nations. Germany’s two-year note yield fell to minus 0.074 percent on July 18 while Austrian, Swiss and Finnish rates also turned negative this week for the first time.

Fiat Bonds

Italian carmaker Fiat SpA paid a yield of 677 basis points more than the benchmark mid-swap rate when it sold 600 million euros ($737 million) of 7.75 percent bonds due October 2016 on July 11.

The Turin, Italy-based company borrowed for five years at a spread of 408 basis points when it issued 1.5 billion euros of 6.875 percent notes in November 2009. It has 6.55 billion euros of debt due by the end of 2016, data compiled by Bloomberg show. Richard Gadeselli, a Fiat spokesman, declined to comment.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. increased, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbing 2.6 basis points to a mid-price of 110.7 basis points as of 11:02 a.m. in New York, according to prices compiled by Bloomberg.

The measure typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of bond market stress, increased 0.56 basis point to 23.75 basis points as of 11:03 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Bonds of San Jose, California-based EBay Inc. are the most actively traded dollar-denominated corporate securities by dealers today, with 245 trades of $1 million or more as of 11:03 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world’s largest Internet marketplace sold $3 billion of debt yesterday in its first offering since 2010.

Junk-rated companies in Europe’s so-called peripheral countries have about $144 billion of debt outstanding, of which 54 percent matures between 2013 and 2016, according to Moody’s. Portuguese companies have 48 billion euros of the debt and those in Greece have 11 billion euros, the New York-based ratings company’s data show.

Sovereign Downgrades

The amount of high-yield debt has swelled amid downgrades of previously investment-grade businesses as reductions in sovereign ratings drag down issuers’ grades.

Moody’s reduced Spain’s rating three levels to Baa3 on June 13, and said it may cut it further. S&P lowered its grade of A to BBB+ on April 26. Italy, which was cut two steps to Baa2 at Moody’s on July 13, is rated one level higher at BBB+ by S&P.

“The real issue is we’ve had lots of peripherals that are fallen angels as a result of sovereign ratings going down,” said Andrew Lake, the head of high-yield at London-based Aviva Investors Ltd., which manages the equivalent of $410 billion. “Those companies have lots of short-dated debt, hence the increase in the wall of maturities 2013 to 2014.”

The cost of insuring European high-yield corporate debt has declined in the past month, though less than for sovereigns.

Crossover Index

The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated borrowers fell to 645.5 basis points, from 753 on May 18, a 14 percent decline, prices compiled by Bloomberg show. The Markit SovX Western Europe Index of 15 governments fell to 255 from 330 on June 1, a 23 percent drop.

The ratio between the two increased to as much as 2.56 times on July 17, the highest since December 2010. The figure has come down from as much as 6.32 times in March 2010.

The deterioration in speculative-grade European company credit is being worsened by the outlook for economic growth.

The euro-area economy stalled in the first quarter as the sovereign debt crisis deepened. Gross domestic product was unchanged from the last three months of 2011, when it shrank 0.3 percent, the European Union’s statistics office in Luxembourg said June 6.

The lack of growth is holding back companies’ capital spending and hiring, reducing tax revenue for governments and deepening the crisis. Unemployment was 24.6 percent in Spain in May, and 10.1 percent in Italy, the Organization for Economic Cooperation and Development in Paris said on July 10.

Paying More

It’s also causing some companies to pay more to raise money or to be taken over when they can’t pay their debt.

Findus Group Ltd., the frozen-food company owned by private-equity firm Lion Capital LLP, will be taken over by its junior lenders in a debt restructuring after it breached debt covenants that creditors had waived in March, four people with knowledge of the situation said July 7.

Under the plan led by Lion Capital, Highbridge Capital Management LLC and JPMorgan, junior creditors will write off more than 200 million pounds ($310 million) of mezzanine loans in return for ownership and provide 70 million pounds in a short-term credit facility, said the people, who declined to be identified because the discussions are private. They will inject 220 million pounds into the company, including 125 million pounds to reduce senior debt, the people said.

Lafarge SA, the world’s biggest cement maker, paid 441 basis points over swaps to issue 500 million euros of 5.875 percent seven-year notes on July 2, its first bond sale after it was cut to junk in March 2011, data compiled by Bloomberg show.

Nokia credit-default swaps rose to 1,192 basis points from 518 on April 19, while Atlantia contracts increased to 381 from 224, Bloomberg prices show.

If companies “don’t have cash on the balance sheet” they’re “not in a good place,” said Andrew Sheets, a European credit strategist at Morgan Stanley in London. “If a company generates free cash then it’s in control of its own future.”

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