Credit upgrade improves CDS rates

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Credit upgrade improves CDS rates

Korea’s credit default risks eased after a global credit appraiser raised its sovereign rating on Asia’s fourth-largest economy, reflecting the soundness of the nation’s overall economic health, industry data showed yesterday.

The credit default swap (CDS) premium for the country’s five-year Treasuries stood at 103.6 basis points as of Monday, down 2.9 basis points from the previous day, according to the Korea Center for International Finance (KCIF). A basis point is 0.01 percentage point.

The spread on CDS reflects the cost of hedging credit risks on corporate or sovereign debt. A steep rise indicates a deterioration of the credit of government bonds and higher costs for bond issuances.

The fall on the CDS premium came on the heels of the rating upgrade of Korea by Moody’s Investor Service. On Monday, the global credit appraiser upgraded the rating by one notch to Aa3 from A1, seating the country at the fourth-highest level in the sovereign assessment.

The spread had risen to as high as 171 basis points in January as fear over the euro zone debt crisis deepened, the data showed.

The decline following the rating upgrade indicates that Korea’s economic resilience is underpinned by the government’s fiscal soundness, the KCIF said.

“Although Korea faces a slump in consumption and mounting household debt, Moody’s view was that they are manageable,” said Oh Hyun-seok, an analyst at Samsung Securities.

Meanwhile, the CDS spread of Samsung Electronics also fell to 69.6 basis points, the lowest mark in over one year, on Monday, despite the lawsuit loss to Apple over patent rights.

Analysts said the upswing in the sovereign rating has more influence over the company’s valuation than a corporate legal dispute, besides the compensation issue that will remain a bugbear for the world’s top smartphone maker.


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