LONDON, Feb 12 (Reuters) - The cost of insuring against U.S. bank JPMorgan Chase defaulting on debt repayments has soared this week and will continue to rise as the extent of losses on loans to troubled corporates sinks in, traders said on Tuesday.
JPMorgan lent about $2.0 billion to collapsed energy trader Enron <ENRNQ.PK> and helped arrange $2.25 billion of loans to bankrupt telecoms carrier Global Crossing <GBLXQ.PK> and $1.6 billion of loans to failed discount retailer Kmart <KM.N>.
At the the close of the U.S. markets on Monday the cost of insuring JPMorgan's <JPM.N> five-year debt in the market for insurance-like derivatives called credit default swaps was 78 basis points over Libor per million dollars at risk. That is 10 basis points more than investors would have been charged a week ago, traders said.
"At one point on Monday JPM was bid at 98 over Libor in New York and it is not settling. Truth is they are way too highly rated for the level of risk they carry," said a trader at a European bank.
Traders expect JPMorgan's five-year default swaps to trade in a 30 basis point range above Monday's closing levels on Tuesday, with the widening bias continuing through the week.
JPMorgan Chase is rated Aa3 by Moody's Investor Services and AA- by Standard & Poor's. But S&P has assigned it a negative outlook on mounting credit problems related to its corporate lending and ailing private-equity business.
This has left the cost of insuring aginst JPMorgan defaulting far higher than for its U.S. peers. Five-year credit protection on Lehman Brothers, rated two-notches lower at A2 from Moody's and A from S&P, was bid at 65 basis points over Libor at New York market close on Monday -- just five basis points wider than a week ago.
"On the face of it you have to say that the market is pricing in a possibly two-notch downgrade in the first half of this year," said a trader at a British bank.
But credit default swaps traders said that while the sentiment towards JPMorgan is negative a few large banks had flooded the market with default swaps on the bank as part of a move to reduce exposure to U.S. corporate failures.
"It is true that some of the price move is not specifically related to JPMorgan but is just about the big guns wanting out of anything that might catch Enronitis," the trader added.
((Richard Lindsay, London Capital Markets, +44-20-7542 2575, fax +44-20-7542 5285, richard.lindsay@reuters.com))




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