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Reseau Ferre de France, the French railway network, has entered a cross-currency swap on a GBP50 million (USD78.16 million) tranche of a recent GBP350 million 50-year bond offering, to convert the proceeds into euros. Vincent Gaillard, responsible for funding in Paris, said the agency entered the swap because it does not keep any currency exposure in sterling. RFF is an active issuer in the sterling market because there is more pension fund demand for long-dated paper in the U.K. compared with France. He declined to disclose the exchange rate for the swap. Reseau Ferre de France has funding needs of EUR1.2-1.5 billion in 2003, but Gaillard declined to specify how much of that would be issued in sterling--although he said since its creation in 1997, sterling has accounted for one-third of its issuance.

The Royal Bank of Scotland Financial Markets plans to start structuring synthetic collateralized debt obligations in Japan in the coming months. "We've been establishing the infrastructure," said Mamoru Kubo, head of interest rate derivatives marketing in Tokyo. RBS established a credit structuring business out of Hong Kong for non-Japan Asia earlier this year (DW, 8/18).

Credit-default protection on Suez turned full circle last week as credit concerns on utilities were countered with improving performance in equity markets, leading to some tightening of spreads. Five-year default swaps settled at 110-120 basis points Thursday, down from 125-150bps at the end of the proceeding week, but up from 95-105bps where they were trading last Monday, noted one trader. Interest in Suez has been dominated by large commercial banks, which are moving to protect their exposure to utilities, he added.

European hedge funds have started snapping up 10-year credit protection on sovereign names, including France, Germany and Portugal, which has resulted in spreads widening. One trader said his desk alone did USD1.5 billion in trades over the last several weeks--unusual in a market that could see weeks without a trade on a single sovereign name. Protection on Germany and France widened to nine basis points/13bps from 5bps/7bps two weeks ago, while protection on Portugal blew out to 16bps from 10bps. Traders said hedge funds also bought protection on Italy, Spain, Ireland and Belgium, but the core trades were on Germany and France.

Polaris Securities, one of Taiwan's largest securities houses with USD1.05 billion in assets, is examining buying credit-linked notes within a year, which would be the firm's first use of credit derivatives. "We're now considering this," said Ting Kuo, an official in the fixed-income department in Taipei. He explained that the firm is considering buying up to USD10 million of notes. "These offer a high rate of return," said Kuo, when comparing the products to traditional bonds.

An investor with a long or short position in an existing credit-default swap can monetise a change in the default swap premium, and realize profit and loss, in three ways:

"We are trying to point out which are the boring companies in the middle."--Chris Francis, head of international credit research at Merrill Lynch, speaking about its new first-to-default baskets, which are designed to have less volatility. For complete story, click here.

United Utilities has entered an interest rate swap to convert a GBP150 million (USD234.34 million) bond offering into a synthetic floating-rate security. Tom Fallon, treasurer at United Utilities in Warrington, U.K., said 95% of its income is generated from regulated monopolies--and is therefore indexed to inflation--so floating-rate liabilities are better matched to its revenue streams. The company is receiving the coupon on the bond in the swap, which is 5.25%, but Fallon would not disclose what United Utilities is paying in the transaction. He would also not disclose the counterparty on the swap. JPMorgan was the bond underwriter.

Portman Building Society, the fourth largest thrift in the U.K. with assets of nearly GBP10 billion (USD15.6 billion), is considering using credit derivatives for the first time. David Stunell, group treasurer in Bournemouth, U.K., said credit derivatives protection is an attractive option in light of deteriorating credit quality in its investment portfolio, which includes government and corporate bonds. In line with many of the U.K.'s largest thrifts, Portman marks its investments to market and therefore sees credit derivatives as a means for hedging out volatility in its earnings statement from unrealized losses.

Representatives of the U.S. credit derivatives market voted against implementing a restructuring definition proposed by European credit professionals by a majority of around 2:1 at last week's International Swaps and Derivatives Association meeting, according to bankers who attended the meeting. The vote, albeit informal and unbinding, is a major setback for efforts to establish a global restructuring definition. The meeting, which was attended by about 60 credit derivatives professionals, was held via video conference at Goldman Sachs' New York and London offices. Only about 20 of the attendees voted on the question of whether the U.S. market should adopt the Aug. 27 definition, also known as "modified-modified restructuring."

The cost of U.S. dollar/yen options slid into single digits last week after spot steadied at a fraction under JPY125. One-month implied volatility fell to 9.6% Thursday, down from 10.5% the week before. The yen hit a peak of JPY125.05 Wednesday, which was a significant level as there was a build up of options with strikes at this level, noted one trader in New York. The spot rate's immediate reversal to JPY124.25 caused implied volatility to fall, however, traders are bullish on the dollar strengthening and expect one-month vol to jump back into double figures in the short term.

The World Bank Group has entered a cross-currency interest-rate swap to convert a ZAR150 million (USD14.3 million) fixed rate bond into a euro-denominated synthetic floater. Hynd Bouhia, senior financial officer in Washington, said the bank pays a LIBOR-based floating liability in return for the 12.5% coupon on the bond. The swap mirrors the bond's two-year and three-month maturity.