It wasn’t just equity markets that welcomed UBS’ mammoth $19bn writedown; credit derivative markets cheered the news too and shaved 7 per cent from the cost of protecting the bank’s debt.
Spreads on UBS’ credit default swaps fell by 9 basis points on Tuesday to 128bp, according to Markit data, after the Swiss bank made a bigger writedown on its subprime bets than most analysts were expecting.
Baffling? So several credit analysts thought on Tuesday, though many suggested investors were cheered by UBS’ plans to raise SFr15bn in fresh funds from shareholders.
There was also a sense of relief that bank may now have purged itself of the worst of its subprime exposure. “Everybody would prefer to own a bank that has owned up to its problems than one that’s still hiding them,” said one credit strategist.
But, in a move that could prompt further reflection from credit investors, Standard & Poor’s in late morning lowered its long-term counterparty credit ratings for UBS to ‘AA-’ from ‘AA’. S&P said:
“Risk management lapses, earnings volatility, and need for new capital arising from UBS’ U.S. mortgage positions are not consistent with an ‘AA’ rating. While we view the rights issue positively, the downgrade also recognizes UBS’ reduced financial and strategic flexibility after raising a huge amount of capital in recent months.”
In line with strong equity markets, credit derivative indices made gains after a choppy session on Monday.
The iTraxx Europe, which measures the cost of protecting 125 investment-grade credits against default, tightened 8bp to 114.7bp. This means it cost €114,700 per year to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover of mostly junk-rated credits tightened 22.1bp to 555bp.