A $32 billion bid from Telefonica for Britain's O2 raised the risk stakes in Europe's credit markets on Monday, pushing the cost of default insurance higher.
Telefonica's all-cash bid, aimed at expanding the Spanish phone company's mobile business, was not the only headline driving up credit protection costs. Japan's Nippon Sheet Glass began wooing British glass maker Pilkington, which pushed up Pilkington's credit default swap prices.
"The market has been short on risk. It wants bad news," said a trader in London. Traders have said in recent sessions that participants have been trying to push spreads on corporate bonds wider but lacked the trigger to do so.
Standard & Poor's made its bad news contribution by cutting Telefonica's rating by one notch to A-. The credit rating agency said it would cut the rating again to BBB+ because of the aggressive nature of the proposed acquisition.
Telefonica's O2 acquisition would be one of the largest deals in Europe since the telecoms bubble burst in 2001 and phone companies were forced to focus on balance sheet repair.
Five-year default swaps on Telefonica were trading at 49 basis points by 1525 GMT, some 5 basis points more on the day. O2 default swaps, meanwhile, were some 2 basis points higher at 46 basis points.
Deutsche Telekom was also 1 basis point wider at 46 basis points because of the bid for O2.
"There's still some speculation that DT will come in with a higher bid, which is why Telefonica and O2 haven't converged completely," said a second trader in London.
"I think the market has taken it too much in its stride. This signals the end of the credit improvement for these guys ... Everyone's got their acquisition boots on," he said.
Away from a potential bidding war in Europe's telecoms sector, five-year credit default swaps on Pilkington rose after the British glass maker said it had received a bid approach from Japan.
Pilkington swaps were up 7 basis points on the day at 64 basis points by 1540 GMT, versus a close at 57 basis points on Friday. They traded at a high of 75 basis points on Monday. That means it costs 64,000 euros to insure 10 million euros of Pilkington debt against default, 7,000 euros more than Friday.
The first trader said the cost of swaps had declined from the day's high because investors were relieved that Pilkington's bidder was not a private equity firm, which would have saddled the British company's balance sheet with debt.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 38.6 basis points more than similarly dated government bonds at 1546 GMT, 0.2 basis point wider on the day.
In the new bond pipeline, Bank of Scotland plans to sell a 1.0 billion pound ($1.8 billion) equivalent UK commercial property mortgage-backed bond, a source close to the deal said on Monday.
He said roadshows would start later this week and continue next week, with pricing to follow.
Citigroup, Morgan Stanley and UBS are the lead managers. HBOS Treasury Service is the arranger.
DaimlerChrysler Bank has also set price guidance for a 700 million euro ($842.7 million) German car loan-backed bond, a source close to the deal said.
Fortis Bank and SG CIB are the lead managers of the bond sale via the special purpose vehicle Silver Arrow.
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