|Corporate Credit Markets Hold Firm In face of Sovereign Sell-off|
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European corporate credit markets have so far remained resilient to the latest sovereign debt crisis, with both investment-grade and high-yield corporate indices widening by only a few basis points following the EU bailout of Ireland and heightened worries over Portugal and Spain.
While the iTraxx SovX Western Europe index of credit default swaps, which is linked to the debt of 15 European governments, has risen to a record high, the iTraxx Europe index linked to the debt of 125 investment grade corporates has remained comparatively stable.
Suki Mann, European credit strategist at Société Générale in London, said: “Investors are recognising that, while the sovereign market may be volatile, most European corporates have a lot of liquidity raised back in 2009, so they have a safety cushion.
The market is not panicking nearly as much as it did in Q2 during the Greece crisis, when investors were afraid there would be a lot of outflows from credit funds. There weren’t, and investors have learnt to be more pragmatic.”
UBS’s credit strategy team said in a research report this month that although the market “remains nervous” about Ireland, there are unlikely to be “systemic problems” because of “persistent inflows into credit and no signs of forced selling from dealers”.
Zoso Davies, credit strategist at Barclays Capital in London, said: “There has been some impact on corporates associated with peripheral sovereigns like Ireland, Portugal and Spain. Investors have been driven here as much by opticals as fundamentals.
“For example, Portugal Telecom’s bonds have weakened, perhaps because it has the word ‘Portugal’ in its name. The building materials firm CRH has also been hit, because it’s domiciled in Ireland, even though only around 5% of its revenues come from Ireland.”
However, large corporates in core EU markets are still raising new capital without apparent problems. France Télécom has bought back existing debt and issued a new €750m 10-year bond and a £250m 40-year bond.
The European high-yield market has also stayed firm, with the iTraxx Crossover Index only up a couple of basis points. This year, European high-yield companies have raised a record €41bn, compared with the previous record of €29bn in 2006.
Mann said: “There’s still a wall of cash looking for yield.”
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Dec.1, 2010