European corporate bonds fall

European corporate bonds fell in value on Wednesday, with Hannover Re hurt by a profit warning in the wake of Hurricane Katrina and subordinated corporate bonds pressured by fears of new issuance.
Hannover Re warned on Wednesday it was unlikely to hit its profit goal for this year after the hurricane tore through the US Gulf Coast.
Five-year subordinated default swaps on the insurer's debt were at 65 basis points by 1440 GMT, four basis points more on the day, and underperforming other issuers in the sector, which were two basis points wider, a trader in London said.
"Hannover Re remains more vulnerable to exceptional 'one-off' events than its larger rivals Munich Re and Swiss Re," credit analyst Robert Montague at SG said in a note to clients. "The consensus view that Hannover Re is a better credit than Munich Re is flawed in our opinion."
Elsewhere, the perpetual subordinated bonds issued by companies such as Sweden's Vattenfall and Danish Oil and Natural Gas (DONG) remained under pressure, another trader said.
"It's the cash bond side under pressure, most clearly the hybrids," he said. "The market is expecting a good amount of supply in the coming days. It's not a huge widening, but we're definitely missing some buyers."
Analysts at Citigroup said in a note that a survey showed both hedge funds and traditional institutional investors had reduced exposure to investment-grade euro corporate bonds.
"The cut has probably been made largely in anticipation of September supply, with fears of a number of hybrid deals in corporates causing widening on a variety of names," they wrote.
The high-yield market was not immune to the broad-based weakness, with more volatile credits like UK engineer Invensys, French chemicals company Rhodia and cable companies widening some 10-15 basis points, another trader said.
The iTraxx Crossover index, used as a barometer of sentiment in the high-yield market, however, was little changed at 286 basis points.
Finnish engineering company Metso however rallied as the company said it would commission a study on whether to split up the firm and forecast improving profitability in coming years.
Five-year default swaps on Metso fell 10 basis points to 125 basis points, a trader in London said, although he said he was cautious on the company.
"The review doesn't mean no increase in leverage. It's certainly not the all-clear for bondholders," he said.
Analysts at SEB warned that while Metso had said it was seeking to achieve investment-grade ratings, it also said it would evaluate spinning off its profitable minerals division.
"(This) could risk leaving current bondholders with a smaller and more volatile company," they wrote in a note to clients.
The European Investment Bank [EIB.UL] led the primary market as it priced a $3 billion 5-year global bond, while Merrill Lynch and Credit Suisse sold sizeable euro deals.
The EIB's bond was priced to give a coupon of 4.125 percent and a spread of 23 basis points over Treasuries, lead managers Barclays Capital, Goldman Sachs and Morgan Stanley said.
Meanwhile, Merrill Lynch sold a 1.0 billion euro 3-year floating rate note and Credit Suisse sold 1.75 billion euros of debt in two parts, an 850 million euro deal maturing in 2012 and a 900 million euro bond due 2020 and callable in 2015.