Spreads on Deutsche Telekom credit default swaps widened 10-15 basis points on the back of its poor stock performance last week. A New York-based trader reported that credit default swap spreads on Deutsche Telekom widened to about 95bps last Thursday from about 80bps the previous week, as investors looked to buy protection. Other telecoms also widened in Deutsche Telekom's wake. For example, Nortel Networks widened from 390bps to 510bps. In comparison with traditional August flow, traders said this week was relatively busy as a result of the market being volatile and spreads widening. The major players were hedge funds and top-tier investment banks, such as Morgan Stanley.
Traders said Deutsche Telekom's slumping stock was the result of Deutsche Bank's decision to sell 44 million Deutsche Telekom shares on behalf of a client about three-weeks ago. The protection has been widening since Aug. 7, the day Deutsche Bank executed a block trade on the telecoms stock. Since then the company's stock has fallen by more than 20% and since March Deutsche Telekom stock has tumbled more than 80%.
Moody's Investors Service recently took rating action against Deutsche Telekom, downgrading its debt from A2 to A3 and placing a negative outlook on the company to reflect its ambitious growth targets. Aidan Fisher, senior investment grade telecom analyst at Moody's in London, said Deutsche Telekom could face difficulty reaching its growth targets and the rating level would remain until the company could prove otherwise.
