Markit’s Gavan Nolan wrote this CDS report.
European credit indices continued to tighten today, helping to reverse the widening seen last week. The Markit iTraxx Europe index was trading around 92bp, about 2bp (2%) tighter than yesterday’s close. Similar movements (in % terms) were evident in the Markit iTraxx Crossover and HiVol indices, and all three outpaced flaccid equity markets.
Tightening credits easily outnumbered names that widened, with the strong performance of cyclical sectors indicating that risk appetite is still alive and well. Financials tightened significantly today, shrugging off concerns over higher capital requirements. The G20 group of nations agreed over the weekend to shift bank capital towards common stock and way from hybrid securities. Their proposals are expected to be taken up by the Basel Committee of bank supervisors.
Defensive names were lagging amid investor optimism. The consumer goods sector was still feeling the effects of Kraft‘s approach for UK confectionary firm Cadbury. Kraft announced yesterday that Cadbury had rejected a friendly £10.2 billion ($16.9bn) takeover offer, the latter firm clearly disagreeing that the offer “represented compelling value to Cadbury’s shareholders”. A deal has obvious benefits to Kraft. The UK company has considerable reach in the developing world, and is well established among smaller retailers, complementing Kraft’s strong presence in supermarkets.
But it appears that Kraft will have to sweeten its offer, currently consisting of a mix of cash and shares. Kraft has a relatively large debt burden, and it is unlikely that it could increase the cash component meaningfully without threatening its investment grade rating. That could leave the way open for other behemoths in the sector, such as Nestle. All three firms’ spreads have performed relatively well during the recession, reflecting the defensive characteristics of the sector. According to Markit data, they trade with AA implied ratings, in line with the official rating of Nestle but superior to the BBB credit profiles of Kraft and Nestle. Kraft’s spreads widened today on the news, though a 50bp level doesn’t suggest that it will get relegated to junk status. Credit investors will be waiting for news of a possible hostile offer, and Kraft’s commitment to an investment grade rating will be under scrutiny.
In the US, credit indices opened the week tighter after yesterday’s holiday. The Markit CDX IG index was trading around 117bp, some 4bp tighter than Friday’s close. Cyclical credits were among the best performers, with financials again standing out. Tech credits also did well after a positive analyst report boosted sentiment. Health insurers widened moderately after President Obama made a speech to trade unions in which he continued to support a public health insurer.