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Derivatives

Finmeccanica Spreads Widen After Bond Sell Off

Credit-default swap spreads on Finmeccanica, an Italian defense and aerospace company, widened 20 basis points to 98bps on Monday, up from 78bps the week before.

Credit-default swap spreads on Finmeccanica, an Italian defense and aerospace company, widened 20 basis points to 98bps on Monday, up from 78bps the week before. Traders interpreted the move as a sign the market is still punishing Italian names in the wake of the Parmalat's debacle.

Jean-Yves Coupin, analyst at BNP Paribas in London, said another reason default spreads widened was Merrill Lynch published a glowing report on Finmeccanica stock late last month. Coupin noted, "If the stock price of Finmeccanica moves significantly, this affects the volatility of the name. Higher volatility may have moved people to buy the convertible bond, coupled with credit protection."

The hedge funds were able to move the spreads because Finmeccanica has a lot of outstanding convertibles and the hedge funds are the main traders of the company's swaps, noted one trader.

The move on Finmeccanica was exaggerated by the market's lack of confidence in Italian names, said another analyst at a German bank. He explained investors are being charged a premium to buy protection on Italian names.

Moody's Investors Service rates Finmeccanica Baa2 stable. This reflects the company's strong market position, but also its low operating margins, noted an analyst.

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