Credit-default swap spreads on Finmeccanica, an Italian defense and aerospace company, widened 20 basis points to 98 over on Monday, up from 78 over the week before. Traders interpreted the move as a sign the market is still punishing Italian names in the wake of Parmalat's debacle.
Jean-Yves Coupin, analyst at BNP Paribas in London, says another reason default spreads widened was that Merrill Lynch published a glowing report on Finmeccanica stock late last month. Coupin notes, "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."
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, notes one trader.
The move on Finmeccanica was exaggerated by the market's lack of confidence in Italian names, says another analyst at a German bank. He explains 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, notes an analyst.