CDS update: Telecoms hit by eastern European exposure

This CDS report was written by Markit’s Gavan Nolan

European credit indices were resilient today in another session dominated by the eastern part of the continent. The Markit iTraxx Europe index was slightly tighter at around 171bp, while the Markit iTraxx Crossover index crept back below 1,100bp. But the relative calm of the indices obscured significant weakness in certain sectors. Yesterday it was the turn of financials, and Italian banks in particular, to widen. A Moody’s report drew attention to the precarious position many central and eastern European (CEE) countries find themselves in, and the possibility of downgrades to banks with considerable exposure to the region.

Today it was the turn of corporates, with telecoms bearing the brunt. Investors have been searching for names that stand to lose from a a slump in CEE economies. Several telecom credits are the obvious candidates. A look at the firms’ respective websites reveals why. All of their internet offerings proclaim their strong presence in the region. Norwegian carrier Telenor boasts of owning the largest mobile phone operator in Ukraine and is “one of the biggest western investors” in the country, according to the company website. Some might say this is a fact best kept under wraps given that Ukraine is the riskiest name in Europe (currently trading at over 50 points upfront).

Telenor is not alone. Hellenic Telecom and Telekom Austria are heavy investors in the Balkans. Bulgaria makes the largest contribution to the Austrian firm’s number of mobile phone subscriptions. Operations outside of Austria accounted for well over 50% of the mobile phone division’s EBITDA in the last quarter. TeliaSonera, a Swedish/Finnish carrier, has sizeable exposure to the Baltics and Eurasia. The latter region, described as “attractive, fast-growing and very profitable” in the 2007 annual report, accounted for most of the company’s earnings growth that year.

Markit chart of Telecoms CDS

It has been apparent for some time that CEE economies are set to slow this year. Many have large current account deficits and will have to retrench this year in order to rectify imbalances. This will inevitably have a detrimental effect on firms with significant operations in the region, and could push spreads even wider. That said, many of the telecom carriers have strong domestic franchises, particularly in fixed-line. State support, either through direct shareholdings or more implicit backing, is also a positive factor from a credit perspective.

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