It has been a tough week for credit although spreads eventually tightened towards the end of the week. The primary market is starting to look a little shaky. The major events this week were the results from RBS, the amendments of the LT2 bond documentation for Bradford & Bingley and finally the announcement of principal writedowns of Dresdner Bank Tier 1.
The credit market has looked rather shaky during the week with indices being highly volatile. Especially the financial indices have been in the limelight following disruptions in the market for subordinated bank capital caused by a change in the documentation of Bradford & Bingley LT2 debt and coupon deferral on Tier 1 instruments by Dresdner Bank (more on next page).
Also the monstrous 2008 losses reported by RBS (a 2008 loss of GBP 24bn) was one of the noteworthy factors during the week. The poor results – which were expected – were overshadowed by the announcement that the UK Government will insure an asset pool of GBP 325bn (face value) on which RBS will take a first loss portion of GBP 19.5bn.
Last week we described how market attention turned to the challenging situation facing Eastern Europe. This week S&P has followed up with a downgrade of Latvia to BB+. Thus Latvia no longer has an investment grade rating. In terms of rating downgrades of sovereigns, a lot more is probably forthcoming.
Despite the volatility during the week, CDS indices are more or less unchanged compared to last week. The investment grade CDS index, iTraxx Europe, currently trades at 176bp compared to 174bp last Friday. The high yield index iTraxx Crossover currently trades at 1070bp compared to 1085bp last week.
