The European market for credit derivatives opened on a quiet note on Wednesday but a number of companies soon saw sharp activity on their credit default swaps, a kind of insurance against a non-payment of corporate debt, amid buy-out approaches and rumours.
For instance, the cost of buying protection against a corporate default in Qantas Airways, Australia’s dominant airline, rose sharply after news that the company has received an A$10bn takeover approach from a consortium led by Macquarie Bank and Texas Pacific Group, the US buy-out firm.
The company’s five-year credit default swaps rose about 20 basis points to about 50bp, the mid-point between the bid and offer spreads, according to one trader in London. That means that it now costs €50,000 annually to insure €10m of Qantas’s debt over five years.
However, Imperial Chemical Industries saw the cost of buying protection against a default on its debt fall after it announced that it was selling Quest, its flavours and fragrance business to Switzerland’s Givaudan for SFr2.8bn (£1.2bn) in all-cash offer. The transaction would leave the UK chemicals group debt free.
ICI said it would use £900m of the proceeds to eliminate its net debt and £230m to reduce its estimated £1.4bn pensions deficit. The remainder would cover one-off charges for deal-related taxes and fees. The five-year CDS on ICI fell 2bp to about 28bp.
The Crossover index — which measures the cost of default protection for risky, mostly “junk-rated” European company bonds — was on Wednesday morning about 1bp tighter at 235.5bp, meaning that the cost of insuring against default for a €10m basket of risky corporate bonds fell slightly.
However, the cost of buying protection against default for investment grade companies remained unchanged, with the main iTraxx Europe index at about 24bp. The iTraxx HiVol index — which covers the 30 companies with the widest spreads in the main iTraxx Europe index — was unchanged at about 46.5bp.
Meanwhile, market rumours of a take-over bid by a private equity group sent the five-year CDS on Vinci, the French construction firm, up 5bp to 36.5bp in early trading.
ITV, the UK broadcaster and Corus, the UK steel group, continued to see activity in the credit derivatives market. ITV’s credit spreads continued to tighten after it rejected NTL’s takeover offer, stating that there was little logic to the combination. This follows BSkyB’s blocking move on Friday.
Separately, “volatility persisted in Corus’ spreads amid uncertainty over the company’s future ownership,” according to Markit Group. Brazilian firm CSN has countered a takeover bid by Tata Steel, which had been accepted by the Corus board.