By Serena Ruffoni
The two-tiered nature of Europe's corporate bond market looks
set to be highlighted once again next week as a key bond index
provider gets set for its semi-annual rejig.
Data provider Markit is next week set to add and remove members
from its indexes tracking firms' credit default swaps, which
provide protection to investors in the case of companies' failure
to pay back bonds. Broadly speaking, safe credits reside in the
main Europe index, while riskier names are in the Crossover
index.
Markit has already said that Telecom Italia (TIT.MI) is likely
to drop out of the main European credit default protection,
shifting instead into the riskier sub-investment grade index
because its credit rating is close to being downgraded to junk.
Such a shift reflects the two-tiered nature of corporate Europe,
with the safer north on one side and the troubled South on the
other side.
The iTraxx Europe index, composed of 125 investment grade
European corporates and banks, and the iTraxx Crossover Europe
index of 50 sub-investment grade credits, are widely used tools for
fund managers as a hedging and trading instrument for their cash
portfolios.
On March 20 the indexes will be "rolled" with members joining or
leaving depending on market levels, liquidity and trading
conditions. Last week, Markit published a provisional membership
list of the indexes.
The new version of the main European index will now have only
nine names from Southern Europe and Ireland out of 125, mainly
banks and utilities from Spain and Italy. In March 2011, there were
18 firms from fiscally shakier states.
"Telecom Italia [drop] is the latest part of a trend of
peripherals falling out of Main and into the Crossover over the
past two years," derivatives strategists from Credit Suisse
commented. "This was mainly driven by sovereign-related downgrades
rather than liquidity."
In fact, the Crossover index is filling up with Southern
European names: 15 of the 50 names now come from Southern Europe
and Ireland. Alongside Telecom Italia, Italian data-provider
company Cerved Technologies and Irish packaging company Smurfit
Kappa (SK3.DB) are now joining the sub-investment grade index
ranks.
Greek, Irish and Portuguese companies found a home in the
Crossover after being excluded from the main index as an effect of
downgrades for the past two years. In March 2011, there were only
eight companies from the region.
On the day of the roll, investors generally move out of the old
indexes series and into the new ones as they prefer trading liquid
positions, causing some jerky but not fundamentally-driven moves.
This time around, Credit Suisse expects the main Europe index to
widen around seven basis points and the Crossover index to push
some 55 basis points wider.
Write to Serena Ruffoni at serena.ruffoni@dowjones.com