Telecom Italia Debt Swaps Surge for Fifth Week on Rating Concern

The cost of insuring against default on Telecom Italia SpA’s bonds surged for a fifth week on concern the company faces a downgrade after missing debt targets.

Credit-default swaps linked to the Milan-based company rose three basis points to 315 at 10:18 a.m. in London and have risen 25 basis points this week. The contracts are the worst-performing among companies in Markit’s iTraxx Europe index of 125 investment-grade companies over the week.

Italy’s biggest phone company, whose debt is more than double its market value, said it cut borrowings to 28.3 billion euros ($38 billion), compared with a target of 27.5 billion euros, when it posted a 4.2 percent drop in earnings today. Telecom Italia and other European former phone monopolies are suffering as competition and contracting economies crimp sales and margins.

“It’s highly probable Telecom Italia will be downgraded,” said Sam Morton, a credit analyst at Mizuho International Plc. “The results confirmed the company is struggling to meet deleveraging targets.”

Telecom Italia has an investment grade ranking of BBB at Standard & Poor’s and an equivalent Baa2 from Moody’s Investors Service, two steps above junk. The ratings have negative outlooks.

The company’s 4 percent bond due 2020 fell 0.38 cents on the euro to 98.76 euro cents, the notes’ first decline since Jan. 30, Bloomberg prices show.

New Issues

In the new issue market, Anglian Water Services Financing Plc is selling 200 million pounds ($315 million) of 13-year secured bonds at 230 basis points to 235 basis points more than gilts, a person with knowledge of the deal said. It’s the company’s first bond since April, when it issued 250 million pounds of 15-year notes, data compiled by Bloomberg show.

Edcon (Proprietary) Ltd. is marketing 325 million euros of high-yield bonds, having dropped plans to sell a dollar-denominated portion, a person with knowledge of the transaction said. The sale will be the company’s largest in the currency since June 2007, data compiled by Bloomberg show.

In credit derivatives markets, the Markit iTraxx Europe Index fell one basis point to 117, curbing a weekly rise to six basis points.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly speculative-grade ratings dropped five to 452, and is up 21 basis points this week, according to prices compiled by Bloomberg.

The Markit iTraxx Financial Index of swaps on 25 banks and insurers declined two basis points to 157, lowering the increase on the week to 12 basis points.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

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