Bonds: sell-off persists on subprime

27 Jun, 2007

European credit markets weakened for a fourth day on Tuesday after US housing and consumer confidence data intensified concerns over the US subprime mortgage market.
The iTraxx Crossover, viewed as a barometer for risk appetite, widened 1.5 basis points to 218.5 basis points by 1430 GMT a dealer said as US consumer confidence fell to a 10-month low in June and sales of new US homes fell to a lower-than-expected level in May.
European corporate credit spreads widened last week after Bear Stearns Cos. Inc said two hedge funds, which had invested in loans containing the riskiest US mortgages, had neared collapse. Bear Stearns said on Friday it would provide up to $3.2 billion in secured financing to one of the struggling funds.
A source close to the matter on Tuesday said Bear Stearns was not planning to bail out the second fund. The ABX index of default protection on the lowest-rated subprime mortgages fell to fresh lows of 55.70 from 56.18 at Monday's close, down 42 percent from its January launch. "There is a lot confusion in the market. Lots of things going on. Lots of strange moves," a trader said.
US oil company Chevron Corp, rated AA by Standard & Poor's and Fitch Ratings and which usually trades at around 9.5 basis points, was 3 basis points wider, he said. "That's very unusual."
A widening in spreads continued across single names, with five-year credit default swaps on Basell soaring 50 basis points to 370 basis points after the Dutch chemical firm agreed to buy US peer Huntsman for $9.6 billion including debt.
The cost of insuring debt of Britain's Experian Group against default increased 3 basis points to 60.5 basis points. Experian, which collects and analyses credit and marketing data, is buying a 65 percent stake in Brazilian credit bureau Serasa for $1.2 billion to give it the lead in one of the world's top growth markets for credit data.
Elsewhere, CDS on Iberdrola nudged 1.5 basis points wider to 19 basis points. The Spanish utility said it would create a share issue to help finance its $4.5 billion cash purchase of US regional gas and electricity supply company Energy East before completing the deal in the second half of 2008.
UK retailer J. Sainsbury remained under pressure for the second day running following renewed bid talk. Its CDS was 3 basis points higher at 75.5 basis points in afternoon trading. Market volatility and concerns over the US subprime market spread into the primary market with Arcelor Finance postponing a planned two-part benchmark euro bond sale.
"Given the current market volatility, Arcelor Finance have decided to put their transaction on hold pending more stable market conditions," one of the banks managing the sale said. Arcelor Finance, the main finance vehicle for steelmaker Arcelor Mittal, had planned to sell 1.5 billion euros ($2 billion) worth of bonds, consisting of a five and a 10-year tranche.
Guidance for the bond was set on Monday following a European roadshow last week. Market concerns, however, did not seem to effect CRH Plc. The Irish building materials group announced it was preparing to issue a debut Eurobond via Barclays Capital, BNP Paribas, RBS and UBS Investment Bank.

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