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A Dire Quarter

14 October 2016 by lberuti

LMETEL ( Telefonaktiebolaget LM Ericsson) is usually a well-behaved credit. Its 5-year risk premium is highly correlated with the risk premium of iTraxx Main (ITXEB), the European investment grade benchmark. It has been a very different story since the beginning of the week though. While ITXEB ended where it begun at 74bps, LMETEL experienced a brutal 5-day trading period. On Wednesday, the Swedish phone-network maker warned on its Q3 results. It reported plunging third quarter sales (down 14%) and earnings, deepening a crisis at a company already slashing jobs (3000 job cuts were announced last week) to cope with slumping demand and intensifying competition. On that day, its stock plummeted 20%. To add to investors’ misery, Moody’s reduced today its credit rating by 1 notch to Baa2, adding that it may be lowered further. LMETEL’s 5-year risk premium, which was already 20bps wider since the beginning of week, increased a further 7bps to 113bps, making it one of the poorest performers of ITXEB. Meanwhile, the broader credit market concluded a fairly quiet week in a fairly quiet way. Credit indices have experienced minimal variations once again. On the week, iTraxx Main is flat at 74bps, iTraxx Crossover is 1bp tighter at 333bps and CDXIG is 1bp wider at 76bps.