This CDS report was written by Markit’s Gavan Nolan
European credit markets gave back some of their gains from this week and widened today. The main Markit iTraxx index was trading around 94bp, 1bp wider on the day. A mixed set of banking results provided the highlight in a relatively quiet session.
BNP Paribas surprised on the upside with its second-quarter earnings. The French bank said net income fell 34 per cent from the same period last year, but this was still better than consensus expectations. A EUR542 million writedown relating to bond insurance exposure accounted for the bulk of the difference from last year.
BNP was at the centre of the sub-prime crisis inception last year when it announced it was unable to value some of its funds. But the bank has taken smaller writedowns than nearly all of its rivals and it remains of the least affected by the current turmoil.
German bank Commerzbank has also performed relatively well. However, its results today indicate that it is not insulated from economic headwinds. Investors were particularly concerned by a EUR250 million loan-loss charge in commercial real estate operations and a downbeat outlook for that sector. Commerzbank is exposed to the ailing commercial property markets in the US, UK and Spain, and raise questions about the bank’s asset quality. Spreads were 2bp wider at 68bp.
Today’s big movers, however, came from the high-yield market. UK airport operator BAA was the largest gainer, rallying to its tightest level since last November after bondholders agreed to its planned refinancing. The plan is crucial to BAA’s survival, as it is currently paying onerous interest costs that would be unsustainable in the medium term. Bond holders will now have their obligations transferred into a ring-fenced entity, where the bonds will be backed by security and guarantees from BAA’s three London airports. Because of the extra rights and protection, BAA should be upgraded to single A on completion of the refinancing.
UK TV operator ITV has seen its spreads more then treble since the beginning of the year and the pain looks set to continue. The company said it made an interim loss of £1.54 billion, mainly due to a £1.6 billion non-cash goodwill impairment charge. CEO Michael Grade said the charge reflected a fall in the value of the company’s licenses to broadcast. Excluding the charge, operating profits were still down from last year, and the outlook for advertising revenue looks set to deteriorate in the remainder of the year.
Spreads in the US were wider amid several disappointing earnings reports. Freddie Mac shook the markets after it revealed a second-quarter loss of $821 million, or $1.63 a share. The quasi-government agency said credit losses had doubled to $2.8 billion and it also took another $1 billion writedown on sub-prime and Alt-A mortgage securities. Spreads widened around 3bp, the relatively small movement reflecting the government’s support, which was made more explicit last month.
The Markit CDX IG index was 1bp wider at 131.8bp.
