The cost of protecting UBS’s debt against default fell on Monday despite the additional subprime hit it reported, as investors took profits on short positions.
Credit default swaps on the bank tightened 6½ bps to 49.5bps in morning trading, according to Deutsche Bank, meaning it cost €6,500 less to protect €10m worth of its debt against default over five years than it did on Friday.
UBS said it would take a further $10bn writedown, and issue SFr13bn ($11.5bn) in new capital to two investors from Asia and the Middle East. It also plans to sell treasury shares, previously due to be cancelled, in a bid to raise further capital and shelve cash dividend plans in favour of an all stock issue.
“We’re now moving into the quieter Christmas period when there is a good chance that credit just slowly grinds tighter,” said Marcus Schueler, head of integrated credit marketing at Deutsche Bank. “UBS is a good example of this where we’ve seen a tightening on the news as people take profits on shorts, along the lines of ‘Buy the rumour, sell the fact’.”.
The iTraxx Crossover index of mostly junk-rated corporate debt tightened 1bp point in morning trade to 346bp.
The iTraxx Europe index of investment grade corporate debt was little changed at 54½bp from 54¼bp on Friday.