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EUR CDS Flow - Credit spreads punch wider on subprime fears
Informa Global Markets - Bondwatch Morning Insight (Europe) (July 27, 2007)

The credit markets hit new wides yet again on Thursday with the performance of the credit indices grabbing the headlines. The iTraxx Crossover index traded out at 405bp and the benchmark US ABX indices hit new lows. The latest US sub-prime loan performance data showed delinquencies continued to rise in July and US new homes data came in softer than expected. The single name moves reflected the weak sentiment, but contacts said that despite a whole host of earnings releases the single names were mostly ignored.

The Industrial sector saw a plethora of earnings, with the Finnish paper makers underperforming and strong figures from ABB. Spreads in the sector were generically 1-2bp wider across the board tracing the weaker market sentiment. Stora Enso said that profits increased but warned that it would struggle to pass on the high costs of wood in the future, causing 5Y CDS to move 6bp wider to 105/110, with a high print of 65. Also reporting was UPM Kymmene which recorded a greater net loss than last year, helping its 5Y CDS move 13bp wider at 90/95. Reporting more favourable figures was Metso after said that Q2 EBITA rose 34% Y/Y and that it sees a continuing favourable market outlook and "exceptionally good visibility for both 2007 and 2008". 5Y CDS on Metso was 1bp wider at 38/42.

Elsewhere, protection on ABB outperformed the sector as its 5Y CDS was unchanged at 26/28 following a 60% Y/Y rise in Q2 EBIT to USD 1.03bln. Also releasing results were EADS, Rolls-Royce, DSM and Syngenta. 5Y CDS on EADS was 2bp wider at 23/25 after profits declined because of charges relating to the Power8 restructuring at Airbus. On the upside the company said that demand for its products was robust with an order intake reaching EUR 70bln boosted by the market successes of Airbus and Eurocopter. Rolls-Royce said that group sales increased 10% Y/Y and its 5Y CDS was 2bp wider at 28/30.

Contacts said that the market was paying little attention to the results from PPR, Kingfisher and Pernod in the Consumer sector, as a majority of the names moved 5bp wider. Traders said that strong results from Lufthansa had not helped stop its spread widening 6bp to 61/63. Elsewhere 5Y CDS on Cadbury Schweppes was 6bp wider at 53/58 as reports circulated that the planned sale of its US beverage unit could be threatened as LBO investors react to the turbulence in credit markets. The report said that the banks handling the sale were forced to lower the amount of debt available for the deal and that it may even be abandoned.

In the Auto sector contacts said that Peugeot"s latest results stood out after it reported late on Wednesday that H1 net income fell by less than expected. 5Y CDS on Renault was at 36/38 (+1bp D/D).



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