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Derivatives

Roller Coaster Ride For Italian Milk Producer's Credit Protection

Five-year credit-default protection on Parmalat, an Italian dairy producer, blew last week on the back of Standard & Poor's decision to put the corporate's BBB minus rating on negative CreditWatch on Tuesday before coming someway back after it sorted out its investment portfolio. S&P's decision caused spreads to widen as far as 640 basis points on Tuesday from 350bps the day before, according to a London-based trader.

S&P placed the company on CreditWatch negative because of concerns about the quality of the group's accounts and Parmalat's cash investments, said Hugues de la Presle, director at S&P in London. In particular, S&P is concerned about the company's investment in Fondo Epicurum and related transactions with this investment fund, he added.

Although Parmalat announced the following day that it was liquidating its position in the Fondo Epicurum investment fund, this did not alter S&P outlook. The spread, however, did tighten dramatically to around 450bps. S&P maintained its stance because of ongoing concerns about the corporate's investment policy and disclosure of financial information, said de la Presle.

As part of the investment in Fondo Epicurum, the fund entered a EUR850 million (USD993 million) foreign exchange swap which generated EUR120 million (USD140 million) of earnings in the first half of the year. S&P would be looking for clarification on why Parmalat entered into such a transaction and if it can unwind this without any additional costs when the corporate reports third quarter results, which were due out last Friday after DW went to press.

Five-Year Credit Protection On Parmalat

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