Bloomberg News

Bond Risk Holds at 19-Month Low as Spain’s Bad Bank Plans Issue

December 20, 2012

The cost to insure financial-company debt from default held at a 19-month low in Europe as Spain’s bad bank planned a bond issue over the holiday period and PSA Peugeot Citroen said it refinanced $15 billion of debt.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers declined one basis point to 137 at 2:15 p.m. in London, the lowest since May 2011. Contracts on UBS AG (UBSN) climbed four basis points to 92 after Switzerland’s biggest lender was fined $1.5 billion for trying to rig the London interbank offered rate.

Sareb, the 60 billion-euro ($79 billion) so-called bad bank set up to purge soured real estate assets from Spanish lenders, will issue senior and subordinated bonds next week, Chairman Belen Romana said yesterday. Peugeot, Europe’s second-largest carmaker, rose as much as 5.1 percent in equity markets after it said it reached an 11.5 billion-euro refinancing deal with about 20 creditor banks to boost liquidity at its lending unit.

“I’m surprised to see Spain’s bad bank will be in the market next week,” Bill Blain, a strategist at Mint Partners in London, wrote in a note. Timing such an issue in the holiday season is unusual, he said.

The creation of Sareb is a condition of Europe’s bailout of the Spanish banking industry that was agreed to in July. Foreign investors are still interested in buying into the bank, Sareb’s Romana said.

Default swaps insuring Spain’s debt rose six basis points to 286 basis points, while swaps on Italy climbed 11 basis points to 268. The cost to insure the debt of Ireland jumped 10 basis points to 217, according to prices compiled by Bloomberg.

Crossover Index

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings was little changed at 444 basis points, the lowest since July 29, 2011. The subordinated financial index fell two basis points to 234, the lowest since May 2011, Bloomberg prices show.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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