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EUR CDS Flow - BNP & WestLB sub-prime issues worry market
Informa Global Markets - Bondwatch Morning Insight (Europe) (August 10, 2007)

Traders said that credit markets were very volatile on Thursday as more rumours and news stemming from US sub-prime losses unsettled investors. Contacts also said that overnight the ECB had to inject EUR 94bln of cash into the euro-zone money markets to help liquidity, which had all but dried up. Initially the iTraxx Crossover index moved tighter, trading down at 307, following some successful bond issues in the US, but sentiment soon turned causing the index to widen out to around the 350 level.

The noises coming from the Financial sector all concerned US sub-prime exposures starting with BNP Paribas which reported that it had frozen redemption and suspended net asset value calculations from three funds citing the "evaporation of liquidity in certain market segments of the US securitisation market". It said this prevented the fair valuation of certain assets. Senior 5Y CDS on BNP was 3bp wider at 22/25 and sub was at 33/37 (+2.5bp D/D). Elsewhere there were reports that the problems at WestLB"s US unit Bridgewater Capital may "far exceed" the trading losses that led to the departure of the CFO last month. WestLB responded that that the bank was not facing a "liquidity crisis" and that this included Bridgewater. 5Y CDS on WestLB senior was 4bp wider at 55/65.

There were similar comments from Commerzbank, which said that it considers itself well prepared for sustained market disruptions from the sub-prime turbulence after posting a 169% Y/Y rise in Q2 net profit to EUR 727mln. Senior 5Y CDS on Commerzbank was 5bp wider at 50/55 and sub was 10bp wider at 65/70. Belgian lender Fortis beat expectations as it posted a 16% Y/Y rise in Q2 net profit to EUR 1.616bln and said that it saw no material impact from the turbulence in the sub-prime market. 5Y CDS on Fortis senior was at 29/32 (-2bp D/D).

Traders said that the Crossover sector was a touch wider on the day, following the indices as SAS, TUI, Ladbrokes and International Power all released earnings. A big mover in the equity markets was SAS, which said that Q2 EBITDAR rose 9.5% Y/Y to SEK 2.2bln but its shares dropped as much as 8.9% on Wednesday"s close as profits missed forecasts. Traders said that the results did disappoint but that SAS"s debt reduction pleased credit investors. 5Y CDS on SAS was 10bp wider at 240/260 in line with the market. 5Y CDS on TUI was 5bp wider at 405/425 after it reported a Q2 EBIT loss of EUR 54.7mln, but posted an unexpected net profit due to a tax gain. Elsewhere, 5Y CDS on Ladbrokes was flat at 260/262 after reporting that H1 EBITDA increased 28.1% Y/Y to GBP 219.4mln and 5Y CDS on International Power was 12bp tighter at 355/377 as it said that H1 profit from operations rose 6.1% Y/Y to GBP 416mln. CS



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