The cost of insuring European corporate debt against default eased again on Monday as sentiment towards banks improved after last week’s loosening of US mark-to-market accountancy rules. In morning trade the Markit iTraxx Europe index of investment grade companies fell 9 basis points to 157bp, while the iTraxx Crossover index of 45 mostly junk credits tightened by 16bp to 903bp.
Spreads on subordinated debt issued by UK banks came in after Standard Chartered became the latest bank to reshuffle its existing securities. The cost of insuring debt issued by Standard Chartered dropped sharply after the bank announced plans to swap £675mn of its subordinated debt for senior securities.
CDS written on the bank’s subordinated debt fell 55 basis points to 455bp, while five year contracts written on its senior debt eased by 30bp to 255bp.
StanChart, which will exchange the callable fixed to floating rate notes for new sterling-denominated senior fixed rate notes, will also offer to buy back its $700m of 2031 subordinated debt.
Several major European banks have been buying back their subordinated debt of late – the latest having been Crédit Agricole, which last week offered to buy back £750m of junior debt at a 28 per cent discount.
Crédit Agricole became the fourth large European bank to make such a move, joining UBS, RBS and Lloyds.
Ahead of Q1 earnings analysts at BNP Paribas are now expecting certain financials to report “spectacular results”, boosted by the buybacks, FASB changes and so-called “viAIGra” – the money doled out to various counterparties from the AIG bailout.
But before anyone gets overly excited, BNP Paribas stress, they should remember where these “profits” came from.
Clearly, these are one-time unsustainable non-economic gains and investors should instead concentrate on the deterioration on the asset side of the balance sheet which holds housing and commercial real estate assets and credit cards as the unemployment picture deteriorates significantly over the coming year.
Elsewhere, credit default swap spreads on ITV fell after weekend press reports raised expectations that the British commercial broadcaster was in the final stages of preparing a rights issue or share placing.
The Sunday Telegraph reported that ITV has been sounding out its key investors and could raise several hundred million pounds. Five year ITV CDS narrowed by 8 basis points to 831bp.
Amongst sovereign CDS, central and eastern European countries enjoyed a post-G20 rally on rising hopes that the extra money allocated to the International Monetary Fund and World Bank will shore up their economies.
Poland, Czech Republic and Hungary saw their CDS spreads tighten. Poland’s CDS was trading at 216bp, down from a peak of 411 on February 24, the Czech Republic’s CDS was trading at 142bp, down from a peak of 325bp on February 20, while Hungary’s CDS was at 459bp, down from 614bp on March 10.