China oil move hits CDS market

China's plans to expand its economic influence overseas are now well-established, and the CDS market today provided further evidence of its increasing global presence.

Canadian oil and gas company Nexen has seen its CDS spreads halve in value from 60bps to 30bps since last Friday, placing it among the strongest credits in North America.

The reason behind the move is that Nexen has asked its bondholders' permission to allow China National Offshore Oil Corporation, a Chinese energy group that recently acquired Nexen, to guarantee the Canadian company's bonds.

The guarantee will rank Nexen unsecured obligations as pari passu with "all existing and future unsecured obligations of CNOOC". In other words, Nexen bonds, assuming bondholders agree, will be full legal obligations of CNOOC.

One might think that credit investors would prefer a tried-and-tested Canadian oil firm to a Chinese organisation with a relatively short track record in the capital markets, but that would ignore the germane fact that CNOOC is fully owned by the Chinese government, and as such shares the credit standing of the state (Aa3, AA-).

CNOOC's CDS spreads, though not the most liquid (Markit Liquidity score of 3), track the sovereign very closely and trade around 70bps. Nexen's spreads were trading at over 250bps prior to the announcement of the deal in July 2012, and tightened dramatically in the immediate aftermath.
They have rallied steadily ever since, and the sharp movement in recent days suggests that bondholders will be only too happy to accept what is effectively a guarantee from the Chinese government.

Staying in North America, the Markit CDX.NA.IG was fighting to hold below 80bps, a level it broke through for the first time yesterday since February 2011. Market catalysts were few and far between, so it was no surprise to see a day of consolidation.

It was a similar story in Europe, though the Markit iTraxx Europe (106bps, +1.5) did give back some ground in the afternoon. British American Tobacco was upgraded to A3 from Baa1 by Moody's, though it had little impact on the company's spreads. BAT already trades with an implied rating of 'A', according to Markit data, so the agency was behind the market in this case.

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