Credit-default swaps spreads on Saint-Gobain blew out last week as the company confirmed it is exposed to 5,000 asbestos claims per month, and in a reaction to the news, protection on building material companies Lafarge and Hanson also jumped. Traders said the spillover effect may be the tip of the iceberg as the market is nervous about exposure to asbestos law suits, particularly after ABB's recent announcement that it could face bankruptcy based on losses from asbestos claims in the U.S. "It is a big unknown and the market is questioning how [asbestos exposure] will affect companies in Europe," said one trader.
When Saint-Gobain made its announcement early in the week, volume increased by at least three times. One trader said the credit would usually trade two or three times per day, but he saw it trade at least 10 times on Monday. By Tuesday, five-year protection had blown out to 280 basis points from approximately 170bps the previous week. Credit-default swaps on Lafarge widened to 135bps/155bps from 120bps/140bps and protection on Hanson moved out to 115bps/130bps from 110bps/120bps. Traders said the bulk of interest for protection on Lafarge and Hanson came from hedge funds making the bet that spreads would widen out further in the coming weeks because of investor nervousness.