Financial Credit Risk in Europe Increases to Highest Since 2013

Why You Need to Pay Attention to Credit Analysis

A measure of credit risk for banks and insurers in Europe rose for a ninth day, climbing to the highest level since 2013.

The Markit iTraxx Europe Subordinated Financial Index of credit-default swaps insuring lower-ranking debt increased as much as 15 basis points to 318 basis points, and was at 306 basis points at 5:40 p.m. in London, according to data compiled by Bloomberg.

Investors are increasingly concerned that weak earnings and a global market rout will make it harder for banks to pay the interest on their riskiest securities, or to buy them back as soon as they’d hoped. Deutsche Bank AG became the largest lender in at least four years to feel compelled to reassure investors and employees that it has enough funds to service that debt.

“We’ve seen horrendously bad earnings at certain banks and signs that they’ll stay under pressure,” said Suvi Kosonen, a senior credit analyst at ING Bank NV. “It’s really difficult to say how or when the market is going to turn.”

Rout Deepens

Bonds that allow banks to skip interest payments without defaulting and turn into equity or are written off in times of stress are coming under particular pressure. UniCredit SpA’s 1 billion euros of 6.75 percent bonds dropped to a record 72 cents on the euro, after the Italian lender reported a decline in quarterly profit. Barclays Plc’s $1.2 billion of 6.625 percent notes tumbled 10 cents on the euro to 84 cents. Securities issued by Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc also fell.

Deutsche Bank’s Co-Chief Executive Officer John Cryan’s assurances that the German lender can pay its riskiest debt failed to stop the selloff. Its $1.5 billion of 7.5 percent notes fell 1.9 cents to a record 73 cents, while its 1.75 billion euros of 6 percent bonds dropped to an all-time low of 70 cents, according to data compiled by Bloomberg.

Credit-default swaps on the Deutsche Bank rose for an eighth day to the highest levels since 2011. Contracts on its senior debt climbed 23 basis points to 243 basis points and subordinated swaps rose 32 basis points to 471 basis points, according to data compiled by Bloomberg based on London closing prices.

Spreads Widen

Other measures of credit risk increased as investors demanded higher yield premiums to hold financial and corporate debt. The yield premium above benchmark government debt for euro-denominated bonds sold by financial institutions rose to 1.6 percentage points, the most since July 2013, according to Bank of America Merrill Lynch index data.

Investors demanded a premium of 1.6 percentage points to hold investment-grade bonds in euros and 6 percentage points for sub-investment grade debt in the currency, index data show.

The spread above benchmarks for dollar-denominated debt also climbed, with investors seeking an extra 2.1 percentage points for investment-grade notes, the highest since June 2012. For junk-rated bonds they sought a more than four-year high of 8.5 percentage points, the data show.

No syndicated primary deals priced in Europe.

“When a story does the rounds like Deutsche Bank, that gets investors’ attention and they use that as an excuse to take risk off,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management, which manages about 291 billion pounds ($420 billion). “Whether this feeds back into a broader weakness in the macro economy in the next couple of months, that’s what is worrying investors.”

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