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Derivatives

Downgrade, Profit Warning Push Up Volumes

The credit-default swaps market saw increased trading volumes last Thursday, due to a Cap Gemini downgrade and a Compass Group profit warning.

The credit-default swaps market saw increased trading volumes last Thursday, due to a Cap Gemini downgrade and a Compass Group profit warning. Management consultant Cap Gemini widened 14 basis points to 99bps as DW went to press Thursday, following a downgrade by Standard & Poor's to BBB minus from BBB. Compass Group, a global food service company, widened 12bps to around 43bps early Thursday morning, in response to a profit warning. It announced its underlying working capital outflow in 2003/04 would be GBP200 million (USD357 million) above expectations. By lunchtime, however, its spread had tightened to around 40bps.

Traders reported interest in buying protection on both names from hedge funds and prop desks. There was also institutional demand for protection for Cap Gemini, said one trader. The move in Compass Group was driven by the cash market getting sold off, said a trader at a German bank. "However, it was more of an equity story than a credit one," he added, explaining why the spread began to tighten later in the day.

Fitch Ratings and Moody's Investors Service do not rate Cap Gemini. Compass group is rated BBB plus by Fitch and Standard & Poor's and Baa1 by Moody's. Frederic Gits, analyst at Fitch Ratings in London, said, "Overall [the profit warning is] a little bit disappointing, but in the wider context of Compass' profits, [GBP782 million in 2003] it seems that it's not a major change."

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