UniCredit recommends Edison negative basis trade

In its 'Daily Credit Briefing' research today, UniCredit recommends a negative basis trade on Edison. Analysts say that buying the company’s 2014 bond at 112bp while buying five-year credit default swap protection at 80bp could result in a pick-up of 32bp.

UniCredit regards Edison’s CDS as slightly too tight for its triple-B plus rating, given that the non-cyclical company aims to increase the stake of riskier exploration and production activities in the medium term. Analysts also point out that higher-rated Enel (A minus) is currently quoted at 85/95bp.

However, the larger exposure of E&P activities will help to reduce risks stemming from volatile prices for natural gas used to generate electricity at Edison’s domestic power plants. Even if the demand for electricity in its main market Italy will remain weak in the second half of 2009, the credit profile should remain stable as Edison seeks to sell a minority stake in the Abu Qir concession in late 2009/early 2010.

Improvements in working capital and a reduced capex programme will bring net debt down to €4 billion from €4.5 billion at the end of the first half. In July, Edison affirmed its guidance for full year 2009 (which it provided earlier this year) and expects to achieve earnings at the prior year's level (on a like-for-like basis, before one-off items). Furthermore, the company should benefit from declining gas prices, eventually leading to increasing spark spreads. Regarding full year 2010, Edison already sold 50% of its electricity production.