Determinants of Bond Spread and Credit Default Swap: Why are they different? The case of Petrobras

In this article, we study the main determinants of Petrobras' credit risk, measured through asset swap spreads (ASWs) and credit default swaps (CDS), replicating the main papers on the theme and analyzing whether the two products price risk differently. Our results allow us to conclude that, curiously, firm-specific (microeconomic) variables are little or no significant to explain the discrepancy between the markets, and that a large part of the difference between them (also known as the CDS-Bond Basis) may be explained by the response of each product to macroeconomic variables. The main contribution of this article is being the first in the literature addressing the theme credit risk or liquidity of a Brazilian company, from the viewpoint of bond spreads and CDS, traded in the foreign market, besides discussing why there is a difference between them.

asset swap spread; credit default swap; basis; bond; Petrobras

Authorship

Fernando Nascimento de Oliveira

Ibmec, Departamento de Economia, Rio de Janeiro, RJ, BrazilIbmec, Departamento de Economia, Rio de Janeiro, RJ, BrazilIbmec, Departamento de Economia, Rio de Janeiro, RJ, Brazil

Renan Feuchard Pinto

Petrobras, Rio de Janeiro, RJ, BrazilPetrobras, Rio de Janeiro, RJ, BrazilPetrobras, Rio de Janeiro, RJ, Brazil

Correspondence Address:Fernando Nascimento de Oliveira Ibmec/RJ - Unidade Centro Avenida Presidente Wilson, 118 - CEP: 20030-020 Centro - Rio de Janeiro - RJ Email: fernando.nascimento@bcb.gov.br

SCIMAGO INSTITUTIONS RANKINGS

Ibmec, Departamento de Economia, Rio de Janeiro, RJ, BrazilIbmec, Departamento de Economia, Rio de Janeiro, RJ, BrazilIbmec, Departamento de Economia, Rio de Janeiro, RJ, Brazil

Petrobras, Rio de Janeiro, RJ, BrazilPetrobras, Rio de Janeiro, RJ, BrazilPetrobras, Rio de Janeiro, RJ, Brazil

Figures | Tables | Formulas

Figures (5)
Tables (6)
Formulas (1)

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Figure 1
Issued volume of corporate bonds in dollars in the U.S. market

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Figure 2
Asset Swap Spreads (in basis points)

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Figure 3
Credit Default Swaps - Petrobras (in basis points)

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Figure 4
Liquidity indexes for the 10-year period (in basis points)

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Figure 5
CDS-Bond basis (5 and 10 years)

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Table 1
Evolution of Petrobras' Rating

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Table 2
Descriptive Statistics

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Table 3
Statistics of the Unit Root Tests

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Table 4
Results of the model for ASW and CDS

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Table 5
Results of the model for the basis

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Table 6
Results of the model for the basis on Main Components

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Figure 1 Issued volume of corporate bonds in dollars in the U.S. market

Source: Bond Radar

Figure 2 Asset Swap Spreads (in basis points)

Source: Bloomberg

Figure 3 Credit Default Swaps - Petrobras (in basis points)

Source: CMA, JP Morgan, Credit Suisse and Morgan Stanley

Figure 4 Liquidity indexes for the 10-year period (in basis points)

Source: Bloomberg, CMA, JP Morgan, Credit Suisse, and Morgan Stanley

Figure 5 CDS-Bond basis (5 and 10 years)

Source: Prepared by the authors.

Table 1 Evolution of Petrobras' Rating

Moody's	S&P	Fitch
Date	Rating	Stock	Date	Rating	Stock	Date	Rating	Stock
10/03/2013	Baa1	Downgrade	11/17/2011	BBB	Upgrade	Throughout the sampling period Petrobras mantained
06/21/2011	A3	Upgrade	06/10/2009	BBB-	Downgrade

Source: Prepared by the authors.

Table 2 Descriptive Statistics

		5 years	10 years
Asset Swap Spread
	Observations	1,272	1,275
	Mean	200 bps	244 bps
	Median	197 bps	241 bps
	Standard Deviation	49 bps	60 bps
	Skew	0.59	0.59
	Kurtosis	-0.16	-0.16
Credit Default Swap
	Observations	1,275	1,275
	Mean	185 bps	209 bps
	Median	166 bps	190 bps
	Standard Deviation	57 bps	55 bps
	Skew	1.90	0.59
	Kurtosis	4.14	-0.16
Basis
	Observations	1,272	1,275
	Mean	-16 bps	-35 bps
	Absolute Mean	26 bps	45 bps
	Median	-15 bps	-36 bps
	Standard Deviation	30 bps	43 bps
	Skew	0.78	-0.10
	Kurtosis	2.52	-0.32
Bond Liquidity
	Observations	1,251	1,275
	Mean	14 bps	9 bps
	Median	13 bps	9 bps
	Standard Deviation	5 bps	4 bps
	Skew	2.17	3.03
	Kurtosis	8.86	27.25
CDS Liquidity
	Observations	1,275	1,275
	Mean	13 bps	12 bps
	Median	11 bps	11 bps
	Standard Deviation	4 bps	3 bps
	Skew	1.07	0.87
	Kurtosis	2.58	1.82
Market Liquidity *
	Observations		1,273
	Mean		2 bps
	Median		3 bps
	Standard Deviation		2 bps
	Skew		-0,28
	Kurtosis		-1,04

* Market liquidity - we used only data from 10-year Treasuries Source: Prepared by the authors.

Table 3 Statistics of the Unit Root Tests

	Increased Dick-Fuller	Phillips-Perron	KPSS
ASW_5	-3.30**	-3.37**	0.11
ASW_10	-3.92*	-3.76**	0.13
CDS_5	-4.31*	-3.85*	0.14
CDS_10	-4.88*	-3.95*	0.13
Basis_5	-5.09*	-4.44*	0.11
Basis10	-3.62**	-3.35**	0.10

* Significant at 1%; ** Significant at 5%. Source: Prepared by the authors.

Table 4 Results of the model for ASW and CDS

	Asset Swap Spread		Credit Default Swap
	5 years	10 years		5 years	10 years
Constant	1.34**	0.55		1.13*	2.01***
Constant	(2.02)	(0.74)		(1.92)	(2.66)
Lagged Variable	0.99***	0.99***		0.99***	0.99***
Lagged Variable	(275.98)	(292.60)		(285.60)	(265.35)
Change in the Long-Term Interest Rate	-122.54***	-92.80***		-3.74	-2.26
Change in the Long-Term Interest Rate	(9.01)	(6.47)		(0.41)	(0.24)
Change in the Slope of the Yield Curve	72.95***	25.71		6.97	6.82
Change in the Slope of the Yield Curve	(4.82)	(1.54)		(0.68)	(0.66)
Return of the S&P500	-0.73*	0.65		-0.70**	-0.83***
Return of the S&P500	(1.94)	(1.70)		(2.51)	(2.63)
Return of the Petrobras' ADR	-0.49***	-0.63***		-0.66***	-0.68***
Return of the Petrobras' ADR	(3.55)	(4.11)		(5.36)	(5.06)
Change in Market Volatility	0.05	0.33		0.07	-0.02
Change in Market Volatility	(0.16)	(0.89)		(0.30)	(0.09)
Change in Share Volatility	0.14	0.24		0.02	0.04
Change in Share Volatility	(0.80)	(1.11)		(0.23)	(0.35)
Change in Market Liquidity	-0.20	-0.78		-0.43	-0.45
Change in Market Liquidity	(0.55)	(1.37)		(1.08)	(1.17)
Change in Bond/CDS Liquidity	0.41***	0.40***		0.24**	(0.29)**
Change in Bond/CDS Liquidity	(4.27)	(2.96)		(2.08)	(2.48)
Lagged Basis	0.02***	0.01***		0.00	0.01
Lagged Basis	(3.43)	(2.96)		(1.00)	(1.27)
Petrobras' Debt	-0.34	-0.72		1.30	1.81
Petrobras' Debt	(0.60)	(1.28)		(1.59)	(1.61)
Counterparty Risk	-4.32	4.47		-4.67	-4.78
Counterparty Risk	(0.41)	(0.45)		(0.49)	(0.51)
Issuance	2.65	6.71*		2.68	1.69
Issuance	(0.71)	(1.91)		(0.64)	(0.40)
Adjusted R²	0.99	0.99		0.99	0.99
F-statistic	2,463	2,423		3,001	2,820
Prob (F-statistic)	0.00	0.00		0.00	0.00

Observations	1,074	1,126		1,122	1,126

Period	2009.02 - 2013.12		2009.02 - 2013.12

Note. The numbers in parentheses represent t-Student statistics. (*) the coefficient is significantly different from zero at 10%; (**) and (***) at 5% and 1%, respectively. Source: Prepared by the authors.

Table 5 Results of the model for the basis

	CDS-Bond Basis
	5 years		10 years
	(1)	(2)		(1)	(2)
Constant	-0.08	0.03		0.25	-0.15
Constant	(0.08)	(0.03)		(0.24)	(0.15)
Lagged Basis	0.97***	0.97***		0.99***	0.98***
Lagged Basis	(171.98)	(119.75)		(212.73)	(155.75)
(Basis_i,t-1>0)		-0.21			0.72
(Basis_i,t-1>0)		(0.40)			(1.11)
DCDS	0.55***	0.55***		0.57***	0.59***
DCDS	(5.24)	(5.24)		(5.12)	(5.97)
Rating	2.34	2.36		-0.36	-0.17
Rating	(0.73)	(0.74)		(0.14)	(0.06)
DUMB6190	0.42	0.45		-0.83	-0.56
DUMB6190	(0.67)	(0.72)		(0.94)	(0.72)
DUMB3160	0.61	0.64		-0.13	-0.28
DUMB3160	(0.89)	(0.92)		(0.18)	(0.37)
DUMB0130	0.63	0.66		-0.09	-0.22
DUMB0130	(0.67)	(0.70)		(0.12)	(0.30)
DUMA0110	-0.46	-0.42		-1.83	-1.80
DUMA0110	(0.39)	(0.35)		(1.30)	(1.32)
DUMA1130	-0.65	-0.66		-0.80	-0.99
DUMA1130	(0.69)	(0.70)		(1.05)	(1.29)
Treasury	58.83***	58.81***		68.40***	69.47***
Treasury	(12.81)	(12.79)		(12.74)	(13.34)
Retorno do S&P 500	-0.69***	-0.69***		0.12
Retorno do S&P 500	(3.14)	(3.14)		(0.38)
BAS_CDS	0.00	0.00		0.06	0.05
BAS_CDS	(0.01)	(0.03)		(0.73)	(0.63)
BAS_Bond	-0.03	-0.03		-0.13*	-0.11
BAS_Bond	(0.53)	(0.53)		(1.69)	(1.58)
Petrobras' Debt	0.66	0.65		1.50**	1.51**
Petrobras' Debt	(1.28)	(1.26)		(2.44)	(2.52)
Counterparty Risk	1.11	1.02		-1.98	-1.87
Counterparty Risk	(0.10)	(0.09)		(0.19)	(0.19)
Issuance	-0.20	-0.19		-6.36	-6.74
Issuance		(0.03)		(1.22)	(1.30)
Adjusted R²	0.97	0.97		0.98	0.98
F-statistics	1,450	1,391		1,639	2,133
Prob (F-statistics)	0.00	0.00		0.00	0.00
Observations	1,148		1,150
Period	2009.02 - 2013.12

Note. The numbers in parentheses represent t-Student statistics. (*) means that the coefficient is significantly different from zero at 10%; (**) and (***) at 5% and 1%, respectively. Source: Prepared by the authors.

Table 6 Results of the model for the basis on Main Components

	∆ CDS-Bond Basis
	5 years	10 years
Constant	32.06**	3.98
Constant	(2.28)	(0.52)
∆ Lagged Basis	-0.34**	-0.27*
∆ Lagged Basis	(2.55)	(1.77)
∆ MMMF	-0.09	0.08
∆ MMMF	(0.51)	(0.66)
On/off-the-run Treasury	1.96	-0.99
On/off-the-run Treasury	(1.48)	(0.94)
Corporate Issuances - World	0.04	0.03
Corporate Issuances - World	(0.44)	(0.48)
LIBOR-Repo Spread	20.01	43.14**
LIBOR-Repo Spread	(0.78)	(2.10)
Bond Liquidity	-1.66***	0.53
Bond Liquidity	(2.98)	(0.80)
CDS Liquidity	-1.40**	-1.48**
CDS Liquidity	(2.06)	(2.09)
Adjusted R²	0.12	0.12
F-statistics	2	2
Prob (F-statistics)	0.06	0.06
Observations	57	57
Period	2009.04 - 2013.12

Note. The numbers in parentheses represent t-Student statistics. (*) means that the coefficient is significantly different from zero at 10%; (**) and (***) at 5% and 1%, respectively. Source: Prepared by the authors.

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Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
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Determinants of Bond Spread and Credit Default Swap: Why are they different? The case of Petrobras

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[1] Correspondence Address:Fernando Nascimento de Oliveira Ibmec/RJ - Unidade Centro Avenida Presidente Wilson, 118 - CEP: 20030-020 Centro - Rio de Janeiro - RJ Email: fernando.nascimento@bcb.gov.br