Big Banks' Debt Trades Like Junk

Amid speculation about downgrades, the bonds of the biggest banks are already at levels suggesting speculative-grade ratings.

For all the speculation over how far Moody’s Investors Service will lower the credit ratings of the world’s largest banks, debt traders are already treating the firms like they’re graded lower than the biggest potential cuts.

Bonds issued by Morgan Stanley and Credit Agricole SA have dropped to prices implying junk ratings, while credit-default swaps on Bank of America Corp., Goldman Sachs Group Inc. and BNP Paribas SA are trading as if the lenders were speculative-grade issuers, according to a separate Moody’s unit that analyzes market data. Even the harshest downgrades in the ratings firm’s review would leave those banks investment grade.

Global Spreads

Elsewhere in credit markets, Internet connectivity provider Zayo Group LLC is offering $1.25 billion of bonds to finance its acquisition of AboveNet Inc. in the largest high-yield offering in almost a month. BAA Ltd., the owner of London’s Heathrow Airport, obtained 2.75 billion pounds ($4.3 billion) of loans to refinance debt maturing next year. A gauge of U.S. corporate credit risk rose the most since June 1.

Awaiting Moody’s

BAA increased the size of its facility after lenders oversubscribed the deal. The financing includes a five-year, 2 billion-pound revolving credit, split among a 1.5 billion class A portion, a 400 million-pound class B piece and a 100 million-pound working capital facility, according to a statement from London-based BAA. The class A loan plays interest of 150 basis points more than the London interbank offered rate and the class B pays 225 basis points more than Libor, the company said.

Markets Diverge

“We think that if you look at every single credit metric there is for Goldman Sachs and, frankly, for many of our competitors, none of the actions they’ve talked about are warranted,” Goldman Sachs’s Viniar said when asked about the Moody’s ratings review on an April 17 conference call to discuss earnings.

Economy Wagers

Credit-default swaps on Bank of America, Goldman Sachs and BNP Paribas imply those banks should be rated Ba1, the top level of junk. Bank of America faces a downgrade to Baa2, Goldman Sachs could be cut two levels to A3 and BNP faces a two-step drop to A2.

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