Credit default swaps referencing Lloyds TSB and HBOS came under pressure on Tuesday as doubts about the agreed merger between the banks rose and stock prices fell.
The cose to insure the senior debt of HBOS rose to 350 basis points from around 300bps at the end of last week, meaning it now costs €350,000 to insure €10m of debt against default. The quoted spread for CDS on Lloyds TSB is around 209bp, up from around 185bp last Friday.
Doubts over Lloyd’s takeover of HBOS have emerged after big falls in HBOS shares. HBOS is now valued at around £6.6bn. Lloyds agreed to buy the bank in a stock swap at £9.5bn on September 17, meaning a big loss for its shareholders at today’s prices.
Broader indices of credit default swaps on investment grade debt have remained steady, ignoring the dramatic collapse on Wall Street. Markets are taking the view that a deal on the US bailout of toxic bank assets will eventually pass through Congress, in spite of the House of Representatives’ decision to reject the package on Monday night.
The flagship iTraxx Europe index was steady at around 123bp, which was the level it closed on Monday, while the high-yield index, the iTraxx Crossover, only edged a fraction wider to around 590bp, up from a close of 585bp.
Elsewhere, CDS of Irish banks narrowed after the Irish government said it would guarantee all bank deposits in an effort to maintain financial stability after a big sell-off in their shares as worries over the Irish economy intensified.
Five-year CDS of Anglo Irish Bank was about 600 basis points, or €600,000 to insure €10m of debt over five years, Allied Irish at 213bp and Bank of Ireland at about 287bp.
In Europe, CDS on Dexia tightened by about 30bp to 500bp after the Belgian and French governments agreed to pump €6.4bn of fresh capital into the financial services group.