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Bond performance – evolution of credit spread in 2012

An important indicator for corporate bonds, apart from the absolute change in price, is the relative valuation of the risk specific to the issuer in comparison to a reference interest rate. This credit risk premium is expressed in what is known as the credit spread. Due to the higher default risk associated with longer bond maturity, long-term bonds generally feature a wider credit spread. This, and factors such as liquidity and trading volume, also apply to the various LANXESS bonds. The chart below shows the evolution of the credit spreads of our bonds and the average credit spread of corporate bonds with a BBB rating and a five-year maturity in comparison to the interest rate swap curve.

LANXESS Eurobond Spreads vs. BBB Corporates Index
Chart: LANXESS Eurobond Spreads vs. BBB Corporates Index

The credit risk premiums on corporate bonds fell in 2012, despite the continued high level of uncertainty in the financial markets. Credit spreads for corporate bonds decreased in the first quarter as signs of Greece’s debt restructuring emerged. This trend continued until the end of 2012, interrupted by fresh tensions in the financial crisis of the peripheral euro countries in the second quarter.

As comparison with our bond that matures in 2018 shows, in particular, the credit risk premiums on comparable LANXESS bonds were well below those for the BBB-rated reference group throughout 2012. The credit risk premiums on our bonds followed the general trend in the first quarter but, unlike those for the BBB-rated reference group, stayed relatively constant in the second quarter. This can be attributed specifically to the high demand among investors for corporate bonds from the core eurozone countries, especially from Germany. Our credit spreads were less volatile than those of the BBB-rated reference group over the course of 2012. The narrower credit spreads and lower volatility of LANXESS bonds underscore the fact that we have good access to the capital market at comparatively low costs. We successfully exploited this good capital market access in 2012 with the financing measures we undertook.

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