This CDS report was written by Markit’s Gavan Nolan
European credit indices outperformed their equity counterparts today, continuing the trend from yesterday. The Markit iTraxx Europe index tightened 152bp, over 3bp tighter than yesterday’s close, while the Crossover was 25bp tighter at 841.5bp. Tightening credits outnumbered names that widened by about four to one, helped by a strong primary market.
Credit Suisse was among the best performers after it announced strong first-quarter earnings. The Swiss bank said it earned SFr2 billion, more than double the consensus forecast and a vast improvement from the preceding quarters. Like its US peers Goldman Sachs and Morgan Stanley, Credit Suisse gained from robust profits in fixed-income trading. Credit investors were also encouraged by its strong capital position and a reduction in the size of its illiquid CMBS portfolio.
Luxury goods firm LVMH was another to gain during today’s rally. The French firm is rumoured to be in talks with Diageo over the sale of its majority stake in Moet Hennessey. No fresh news emerged today but the reaction of the markets today (see chart above) suggests that investors are placing more credence in the story. LVMH’s spreads are now trading tighter than Diageo’s for the first time since November 2007, apart from a brief period last October.
ITV‘s spreads widened significantly following news that its high-profile chairman Michael Grade is to step down. Credit investors, however, were more concerned with the broadcaster’s assertion that it will not tap the equity market for funds. Bondholders had been hoping that the firm would address its considerable debt burden by announcing a rights issue. Instead, ITV increased leverage through a covenant-free loan and insisted that asset sales would be sufficient in strengthening its balance sheet.
Elsewhere, there was more negative news for credit investors, notably in the auto sector. Volkswagen is reported to be considering an acquisition of its bête noire Porsche. A takeover would clearly be detrimental to VW’s balance sheet as it would use most, if not all of its available cash balance.
The outperformance of credit was even stronger in the US, with tightening credits outnumbering widening names by about seven to one. The Markit CDX IG index bucked a deteriorating stock market and tightened nearly 3bp to 182.75 in a broad-based rally. Relatively upbeat earnings from several firms helped boost sentiment. Black& Decker‘s spreads tightened sharply despite posting a large decrease in first-quarter profits. The firm also cut its full-year forecast and was bearish in its accompanying statement. But the Q1 results still topped consensus estimates, reflecting the low state of current expectations. The paper and packaging sector continued its strong performance after posting better than expected figures.