Credit-default protection on utility Duke Capital, a subsidiary of Duke Energy, more than doubled last week amid revelations about the company's engagement in roundtrip energy trades. Five-year default swaps ballooned to 290-300 basis points by late Wednesday in New York, up from 110-120bps a week before, according to traders. The company acknowledged last week that only 22 of its energy trades could be characterized as roundtrip trades, but that didn't stop investors from hitting the panic button on the energy company. Duke is also one of a handful of utilities being sued by the state of California for manipulating energy prices. "None of this stuff is new, but the headlines have been a little worse this week and the market is choosing to focus on them and people are panicking trying to hedge this thing," said one credit derivatives trader in New York.
Rodney Lacey, a credit analyst at Morgan Stanley in New York, said that although Duke does appear to have engaged in roundtrip trading, he noted those trades account for only USD126 million of an overall USD45 billion in energy trades at the company. "It's a very small portion of their total portfolio," he said. However, Lacey said Duke Capital's ambitious funding plans for the year have shone a spotlight on the company at a time when energy investors are already extremely wary. "They need to be in the market and to the extent they have this overhang and it creates volatility, their financing costs go up, [leading to] issues that start affecting its credit profile," he said. However, Lacey stressed the company "will be fine in the end" and remains highly rated at A3 by Moody's Investors Service and single A from Standard & Poor's.
