Cost of insuring UK corporate debt soars
The Financial Times Limited
By Robert Cookson and Sarah O'Connor in London
Jaunuary 22, 2008

The cost of protecting corporate debt against default surged in Europe yesterday as fears intensified over the fate of global bond insurers and the $2,400bn (€1,662bn) of debt they guarantee.

The credit market was in its blackest mood since the height of the summer's subprime panic after Ambac, one of the biggest bond insurers, or so-called monolines, was downgraded by Fitch Ratings on Friday.

Smaller insurer ACA - which has been slashed to junk - managed on Sunday to stave off the threat of insolvency for another month. Its trading partners, which include investment banks, have agreed to waive all requirements to provide more collateral on insurance deals until February 19. But the agreement did little to calm wider concerns.

"The biggest near-term risk to all credit - and with it all asset classes around the world - seems to be from the potential unravelling of the monoline sector," said Jim Reid at Deutsche Bank. "The downside risk could be extreme."

Ambac's downgrade triggered a ripple of downgrades for the previously top-notch bonds it guarantees, including those issued by London Underground and Arsenal, the English football club.

Analysts fear more downgrades for the bond insurers will spark a fire sale of the billions of dollars of bonds they have insured. This could cause a wave of losses for companies that hold the assets.

The cost of insuring the debt of the 125 investment-grade companies in the iTraxx Europe index jumped 10 per cent to a record. It now costs €81,000 ($117,000) a year to insure the equivalent of €10m of the index's debt against default over five years. This means the market thinks top European companies are more likely to default than at any time since the index began in 2003.

"The reality is we've gone from a raging bull market in credit to a bear market. Now people are worrying about anything and everything," said David Brickman, director of credit strategy at Lehman Brothers.

The iTraxx Crossover index of mostly junk-rated European corporate debt continued into uncharted territory, jumping 9 per cent to about 489bp - within striking distance of a record. Analysts said if the monolines' creditworthiness deteriorated, the index could surge to 700bp.

ACA gains time, Page 17 Sentiment shifts, Page 29

Copyright The Financial Times Limited 2008

Original Text