Credit derivatives traders turned their attention to Railtrack last week as shares in the U.K. rail network manager plummeted. The credit default swap spread for five-year protection blew out to 65 basis points/75 basis Wednesday from 45bps/55bps Monday. Anjan Malik, v.p. structured credit trading at Lehman Brothers in London, said "The market does not believe Railtrack can default, it is too strategic an asset." He added, "If this was in the U.S. it would be trading at 300bps or 400bps."
One trader estimated USD30 million (notional) in credit protection traded on Tuesday in comparison to approximately USD10 million every couple of days in a normal week. He added, "It will stay on our radar screen until the share price settles." Traders said the flow came from customers hedging their positions rather than bank prop desks.
The pace of the equity's fall quickened after a report by ABN AMRO stated Railtrack's share price could fall to as low as GBP0.58 (USD0.80). Officials at ABN AMRO declined to comment. Analysts estimate there is a gap of between GBP2-6 billion between Railtrack's expenditure and its revenue. Railtrack closed at GBP3.50 Wednesday down from GBP4.38 Monday and from a 52-week high of GBP11.99.
