This CDS report was written by Markit’s Gavan Nolan
European credit markets started the week on a negative note, continuing the bearish trend prior to the weekend. The Markit iTraxx Europe recovered some its losses from this morning but still finished around 4bp wider at 208bp. The Markit iTraxx Crossover was more resilient, bouncing back from record wide levels to finish the day 8bp tighter.
Widening credits outnumbered those that tightened, with financials again underperforming. UK-based insurer Aviva widened beyond 500bp for the first time as negative sentiment gathered momentum. The company posted a heavy loss last week and, more importantly, announced it would maintain its dividend. The latter decision caused its spreads to spiral upwards and its stock price to plummet. Other insurers also widened, though none to the same extent as Aviva.
Banks, notably in the UK, continued to widen. Barclays Bank threatened to exceed its previous record wide level reached in September amid concerns over the outcome of its negotiations with the government this week. Over the weekend, Lloyds Banking Group announced a deal that would give the government a majority stake in the bank. As part of the deal, Lloyds will participate in the government’s asset protection scheme (APS), which insures against losses on troubled assets. The talks this week are expected to determine whether Barclays will follow suit. Barclays has been adamant that it does not want the government to take a stake in the bank, and the uncertainty surrounding its ownership and potential participation in the APS could weigh on the bank’s spreads until the situation is clarified.
In the US, the announcement of a major acquisition failed to boost the market. Pharmaceuticals giant Merck said it has agreed to buy Schering Plough for $41 billion in cash and stock. Merck’s spreads widened significantly after the announcement, reflecting the increase in leverage post-acquisition. Schering Plough, however, tightened sharply. This is unsurprising given Merck’s superior credit profile (Aa3/AA- compared to Baa1/A-).
But the announcement had little impact on the wider market. A defensive deal in a defensive sector was unlikely to generate much positive sentiment. The Markit CDX IG index was trading around 258bp, about 8bp wider than Friday’s close. Only a handful of names tightened, with insurers again underperforming. National Rural Utilities Cooperative Finance Corp, better known as NRUC, widened sharply, though the reasons were unclear.