This CDS report was written by Markit’s Gavan Nolan
The rally continued apace today, with the main indices tightening to levels last seen in mid-November. The Markit iTraxx Europe index threatened to go below 150bp for the first time this year in a broad-based rally that matched stock markets.
Autos outperformed as it became increasingly clear that governments are ready to support the industry. Lord Mandelson, the British Business Secretary, announced a £2.3 billion loan guarantee scheme aimed at securing solid firms that are having problems accessing credit. But unions and industry bodies are pressing for the government to address the fundamental issue behind the malaise: consumers unable to access credit. Consumers buying cars usually do so through loans, often obtained from car makers’ finance divisions. The dire conditions in the credit markets mean that these firms are unable to access funding and thereby offer loans. A likely solution is extending Bank of England funding facilities to vehicle financing units.
Auto parts maker GKN Holdings has suffered more than most from the downturn in demand for cars, and recently lost its investment grade rating from Moody’s. But it rallied today after it said that its full-year pre-tax profit would be at the top end of the £150-£170 million range given in November. The firm benefited from sterling’s recent depreciation and a strong performance at its aerospace division. However, GKN has been forced to layoff workers and put the remaining employees on shorter hours, a reminder of the inclement conditions in the auto industry.
BSkyB was another name that stood out. The pay TV provider posted better than expected second-quarter results, driven by broadband and TV subscriptions. Credit investors were encouraged by free cash flow for the six months to Dec 31 more than doubling to £276 million. The company’s spreads widened sharply in the latter months of 2008 on concerns that it could be impacted by the recession. Today’s figures would seem to justify the recovery this year.
French hotel group Accor was one of the few names to widen today after it issued a new 5-year euro denominated bond. The issue was priced at around 460bp over mid-swaps (CDS trading at 155bp), reflecting the negative basis currently seen in CDS vs. cash.
Bullish sentiment prevailed in both the credit and equity markets in the the US today. The Markit CDX IG index was trading around 194bp, off the 190bp level seen earlier today but still over 4bp tighter than yesterday’s close. All but one of the CDX constituents (Dow Chemical) tightened, with financials and TMT credits leading the way.
Wells Fargo rallied today, despite posting a large fourth-quarter net loss. Investors were encouraged by its assertion that it has no plans to ask for further government funds. Reports that the Obama administration is finalising plans for a “bad bank”, removing distressed assets from bank balance sheets, helped boost the whole sector.
