Bonds from BT, Britain's dominant fixed-line telecoms company, diverged on Friday, as a report of take-over interest hammered some issues but boosted others that contain safeguards against a debt-heavy buyout.
The Times newspaper said BT could attract a 20 billion pound ($35 billion) bid from private-equity firms, and cited an unidentified senior telecoms adviser for a venture capital firm as saying his firm had been "running a slide rule over BT". BT dismissed the report - and many in the debt market were sceptical - but it comes in the wake of rising private-equity activity in the European telecoms sector. A clutch of funds bought Denmark's TDC last year for $12 billion.
Bondholders fear leveraged buyouts (LBOs), which are funded by loading a target's balance sheet with debt. However, much of BT's debt is protected by "change of control" covenants, which allow investors to sell bonds back to a company if a take-over hurts its credit rating.
The spread on BT's 2016 sterling bond, which has these clauses, tightened about 7 basis points, to be bid at 96 basis points over equivalent UK government gilts, a sterling trader said, while BT's unprotected 2020 sterling bond fell in price.
Analysts at Royal Bank of Canada were scathing about the report, saying it was "as spurious as it gets and highly unlikely to materialise given obvious obstacles".
Those include the "pension fund deficit, covenant protection on most of the company's bonds and an enterprise value (including pension fund deficit) of well over 30 billion pounds," the analysts wrote in a note to clients.
The cost of insuring BT's debt against default rose, with 5-year credit default swaps rising 12 basis points to 54 basis points, a second dealer said, meaning it costs 54,000 euros ($64,920) a year to insure 10 million euros of its debt against default.
"Given the equity's traded up a bit, it's not entirely clear what your upside is being long risk on a credit default swap basis," the dealer said.
Elsewhere in telecoms, default swaps on Britain's Vodafone fell slightly, after it said it was in talks to sell its struggling Japanese business to Internet communications conglomerate Softbank Corp.
Five-year default swaps on Vodafone fell 2 basis points, to be bid at 32 basis points, the second dealer said. In autos, another of the market's biggest sectors, credit default swaps on major carmakers rose, as worries grew about US auto parts maker Dana, which late on Friday afternoon filed for Chapter 11 bankruptcy protection.
"Ford Motor Co was the biggest mover, with its CDS up 100 basis points in the last 24 hours. Ford Motor Credit is also 30 basis points wider on the day," a trader in London said, before Dana's filing.
Ford is a key Dana customer. Credit default swaps on Ford, the number two US car maker, traded as high as 1,000 basis points. Default swaps also rose on the financing arms of Ford and rival General Motors, he added.
In the wider market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 49.2 basis points more than similarly dated government bonds at 1637 GMT, 0.1 basis points higher.
In the primary market, British services group Rentokil Initial, whose businesses range from rat-catching to tropical plants, said it plans to sell a benchmark-sized sterling bond with an intermediate maturity.
A banker familiar with the deal said it would probably total at least 250 million pounds ($438 million), and would contain a "change of control" covenant. Rentokil's debt was hit by take-over worries last year.
Barclays Capital, BNP Paribas and Royal Bank of Scotland are lead managers.
The spread on Rentokil's 6.125 percent sterling bond due November 2008 widened slightly, the sterling trader said, to be bid at 73 basis points over UK government gilts.
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