The cost of buying insurance against bond default for risky corporate names, using derivatives, rose in the London markets today as investors reacted to a fall in European share prices.
The so called iTraxx Crossover index, which covers 50 credit default swaps for sub-investment grade companies, rose to 205.5 basis points, at midpoint level, from late Friday’s level of 204bp. The main iTraxx Europe index of 125 investment-grade borrowers stood at 22.725 bp a fraction higher than its level at the end of last week.
Credit default swaps are instruments which provide a form of insurance against non-payment of debt.
Among individual companies, Reuters was being closely watched after Thomson Corp unveiled plans for an £8.8bn cash-and-shares takeover of the company. The cost of buying protection was trading at 31.5bp, midpoint on Tuesday morning, compared to 35bp on Friday, according to Deutsche Bank.
Wm Morrison’s five-year CDS moved five basis points wider to 60bp, after a flurry of media reports over the weekend that private equity groups are considering bidding for the U.K.’s fourth biggest supermarket chain. Separately, EMI music group saw its CDS spread widen by 5bp to 110bp, amid continued speculation that the group could become part of an acquisition battle.
“It just will not go away, but we’re now seeing private equity and others being flushed out and tabling bids and/or indicating interest in potential targets,” said Suki Mann, of Societe Generale. “Still, the contagion impact of announced/speculated deals is extremely low with the market preferring, for now, to consider these as idiosyncratic events.”
He added: “Still, amid all this, the only confirmed deal of an investment grade corporate succumbing to the private equity bid in over a year is Alliance Boots. So not all doom and gloom. Single names continue to edge lower for choice, cash is rock solid and the indices stable”.