This CDS report was written by Markit’s Gavan Nolan
European credit markets gave back some of their gains from yesterday as the positive sentiment surrounding financials faded. But the spread widening at the close was modest compared to the morning session. The Markit iTraxx Europe index was as wide as 203bp, 11bp wider than yesterday’s close, shortly after the open. However, credit mounted a partial recovery in the afternoon following a strong opening on the US stock markets. Credit still underperformed equity, with the main index closing around 199bp, while stocks were about 1-2% down.
Italian energy group Enel was one of the few European credits to tighten after it announced measures to reduce its debt burden. The company said it plans to raise up to EUR8 billion in new capital through a rights issue, becoming the latest in a long line of firms to tap its shareholders for funds. Enel is also targeting EUR10 billion in asset disposals and cutting its investment by EUR12 billion in the 2009-2013 period. The dividend policy will change to a payout ratio of 60%, allowing it to save more cash. Overall, the utility expects the measures to reduce its net debt to EUR41 billion from the current EUR50 billion by 2013. Credit investors will welcome the company’s commitment to maintaining a single A rating. Enel’s acquisition of an additional 25% stake Endesa has placed pressure on its credit profile and a downgrade to BBB was a real possibility. Despite the announcement today, Enel’s CDS spreads are still consistent with a BBB rating, reflecting the execution risk on the asset disposals.
In the US, credit and equity were more in tune. The Markit CDX IG index was 3bp wider at 247.5bp. But tightening credits outnumbered widening names, a pattern more consistent with the rallying stock markets. General Electric was once again the centre of attention. The conglomerate lost its precious AAA rating after S&P downgraded it to AA+. The rating agency said the action reflected poor performance at its financial division GE Capital. GE has held a AAA rating from both major rating agencies since 1967, and the downgrade will come as a blow. Bu the damage from the rating cut was superficial. It was expected by the market – the firm’s spreads have been trading in junk territory for some weeks now. The fact that S&P only cut it by one notch and placed it on stable outlook was something of a surprise. However, it remains to be seen whether the other agencies will be as generous. Spreads still indicate that the firm is facing difficult times, with GECC’s deteriorating asset quality likely to weigh on the company for some time.
