This CDS report was written by Markit’s Gavan Nolan
The rally in European credit was curtailed today after several companies disappointed with earnings. UK consumer goods firm Unilever said its net profit for the second-quarter fell 20 per cent, mainly due to disposals and the strength of the euro. Total revenue, measured at constant currencies and excluding acquisitions and disposals, grew by 6.8 per cent, roughly in line with consensus expectations. However, investors were most concerned by flat volumes, overshadowing strong operating margins.
British Telecoms’ headline figures were solid, and its revenues beat expectations. The UK telecoms provider also affirmed its full year guidance. But its spreads widened as a closer look at the results revealed some surprising weaknesses. BT’s free cash outflow of £734m for the first quarter was nearly five times that of the same period last year, and the CEO Ian Livingstone acknowledged that this would concern investors. His comments that margins in BT’s key global services division may fall in 2008/2009 added to the negative sentiment. A large increase in the company’s pension deficit completed the gloomy picture from a credit perspective. Spreads were trading around 93bp, 7bp wider on the day.
Gas Natural has been the worst performing credit for most of this week, and today was little different. The Spanish utility has agreed to acquire power company Union Fenosa in a debt-financed deal. Gas Natural has a relatively small amount of debt on its balance sheet but post-acquisition the combined group will have over total net debt of about €20bn.
In the US investors were preoccupied by below-par economic news. US growth figures for the second-quarter came in at 1.9 per cent on an annual basis, a sharp increase from the 0.9 per cent seen in the first-quarter but still below consensus expectations of 2.3 per cent. Higher exports generated by a weak dollar and the effects of tax rebate checks on consumer spending were expected to provide a more emphatic boost to the economy. A significant revision to 2007 fourth-quarter GDP – now showing a contraction of 0.2 per cent rather than a rise of 0.6 per cent originally released – demonstrated that the US was closer to recession than previously thought.
Amid the gloom, telecoms equipment maker Motorola provided one bright spot. The company surprised investors by posting a small profit for the second quarter. Wall Street had been expecting a loss of three cents a share, but the firm’s cost cutting efforts meant that it confounded predictions. However, Motorola’s spreads could face further volatility in the months ahead amid uncertainty over its restructuring plans.