Credit-default protection on Suez turned full circle last week as credit concerns on utilities were countered with improving performance in equity markets, leading to some tightening of spreads. Five-year default swaps settled at 110-120 basis points Thursday, down from 125-150bps at the end of the proceeding week, but up from 95-105bps where they were trading last Monday, noted one trader. Interest in Suez has been dominated by large commercial banks, which are moving to protect their exposure to utilities, he added.
Trading was largely motivated by movements in TXU Europe, which has been downgraded to Caa2 by Moody's Investors Service and CC on negative watch by Standard & Poor's, indicating both rating agencies believe it may default.
Suez is active in the energy, water and waste industries, but only has water exposure in the U.K., which insulates it to a large degree from the TXU Europe fallout, noted Rodolphe Ranouil, analyst at HSBC in London. At the beginning of the year Suez detailed an aggressive expansion plan that concerned bond holders, promoting HSBC to stamp the firm with a negative outlook. However, this expansion strategy has now been tempered, said Ranouil. The major concerns surrounding the company now are how it will consolidate and strengthen its balance sheet in the present depressed equity markets.
Five-Year Protection On SUEZ
