Peripheral Corporates Under Sovereign Stress

Analysts at Deutsche Bank Securities provides weekly credit strategy as corporates are being under sovereign credit crisis stress.
With Italy and Spain under further stress, a key question as to how corporates from these countries have been impacted in both Government bond market and the credit market. As banks face serious systematic problems as cited previously, non-financial corporates also experience the same issues. Thus, the analyst highlights on corporate’s performance in credit markets and their local sovereign.
The analysts observe that corporate credit moved in line with credit market and other corporates during the 08-09 credit crunch. However, this trend has changed since spring 2010 due to corporate underperformance and debt despairs of their countries. As such, underperformance is directly proportional to their country’s distress. On comparison, the analysts find that corporates have outperformed significantly the local governments over the crisis. Corporates in Portugal & Ireland traded wider than their sovereign and outclassed remarkably. They reached the highs of around 700bp and 1,300bp in July this year. With Italian and Spanish corporates trading wider than their sovereigns till recently and are now c.150bp and c.130bp tighter following the last month’s sovereign under performance.
The government bonds are the main reason for the corporate sovereign gap, as they outperform on sovereign stress and underperform on positive government news. The analyst indicates that corporates have low-beta defensive equivalents of local government bonds. The vital fundamental reason for such conduct is that corporates are priced off the relevant maturity bund and not off the local government. Italy and Spain are stressed presently and not distressed, and the differential may widen further if the current macro persists or may worsen over Eurozone authorities deferring action. If ECB steps in with an enlarged SMP that may save the situation, it could result in corporates underperforming the local government.

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