Fitch: CDS Spreads Becoming More Integral to Corporate Treasuries

Credit default swap (CDS) spreads and other short-term market-based indicators have become more valuable market gauges for corporate treasuries, who have seen a notable change in their own responsibilities post-crisis, according to Fitch Solutions.

In its report, entitled
‘Credit Risk Indicators for Corporate Treasury’
, Fitch says that while credit ratings and fundamental financial data are integral in gauging the long-term outlook of a company’s health, the real-time movement of CDS spreads can and have served as a valuable early warning signal for corporate treasurers.

“Sudden changes in CDS movement would enable corporate treasuries to quickly identify and mitigate changes in their company’s credit risk exposure to bank counterparts, suppliers and customers,” said Fitch Solutions director Diana Allmendinger.

Proof of this lies with two US companies that have recently made headlines: Dell and JC Penney. After out-performing their peers during the first half of 2012, Dell’s CDS spreads began to widen considerably in the middle of last year, with spreads coming out more drastically upon news of a potential leveraged buyout. A similar trajectory was evident with JC Penney last year. The Fitch Solutions report discusses both case studies in greater detail.

Looking at the bigger picture; “CDS movement in recent months appears to indicate that corporate and financial credit risk is realigning,” said Allmendinger. Fitch Solutions’ CDS indices of North American financials and nonfinancial corporates are pricing within 10% of each other since mid-February 2013 and within 2% as of 1 May.

This contrasts with just after the financial markets unravelled late in 2007, when CDS spreads on non-financial corporate institutions in North America were pricing nearly three times wider than swaps referencing financial firms.

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