Five-year credit-default swap spreads blew out 70-80 basis points early last week on ThyssenKrupp, the German industrial conglomerate, in reaction to Standard & Poor's putting the company's BBB credit rating on negative watch. The credit was trading at 220-240bps Thursday from about 150-160bps Monday, according to traders in London. Volume jumped three times to around 10 trades a day, said one dealer.
The rating action had such an impact on default swap spreads because S&P indicated it could downgrade the company two notches, which would result in ThyssenKrupp losing its investment-grade status, traders said. The ratings agency pointed to the company's EUR7.1 billion (USD7.69 billion) in unfunded pension liabilities as the rationale for putting ThyssenKrupp on negative watch.
Arndt Muthreich, head of investment-grade research at Dresdner Kleinwort Wasserstein in London, said the company has actually reduced its debt burden to EUR4.7 billion for the fiscal year 2002 from EUR6.4 billion for 2001. "The timing of this is curious," he said, adding that ThyssenKrupp has shown an increase in profitability over the past three quarters. Also, steel prices have been rising steadily over the past few months as European producers have reduced their capacity, which should benefit profits over the coming quarters.
Five-Year Credit Protection On ThyssenKrupp