Bonds: Aventis credit pressured on Sanofi deal

Franco-German drug-maker Aventis SA was at the centre of attention in the bond markets on Monday, with its bonds trading lower as it accepted a bid from Sanofi-Synthelabo that is seen as pressuring credit quality.
Sanofi is offering five of its shares and 120 euros for every six Aventis shares.
The amount of cash on offer is sharply higher than under its previous bid, meaning the combined company will have a higher debt burden and leading the cost of insuring against a default by Aventis to rise some 36 percent.
"We've traded down and now we're about seven-eight (basis points) wider on the day," said one trader of Aventis bonds. Aventis' 4.25 percent euro bond due in September 2010 was bid at 50 basis points over Bunds at around 1445 GMT.
However, real selling was limited to small accounts, he said. "There's been no big European fund managers coming in and saying, 'give me a bid now.'"
The cost of insuring against a default by Aventis rose by around eight basis points to a high point of 30 basis points, another trader said, meaning it costs 30,000 euros a year to insure 10 million euros of debt against default. Around 1445 GMT, default swaps were just off their highs at 28.5 basis points.
Both companies' shares fell once trading resumed. Sanofi has said it has a 16-billion-euro loan in place to cover the cash part of its bid for Aventis, but has also said debt tied to the acquisition would be repaid over five years through cash flow generation.
"Sanofi still claims it can pay back the debt in five years, so in their view the need for them to issue long-term bonds in the near future probably seems relatively limited," said Rik Fennema, director of fixed income credit research at Dresdner Kleinwort Wasserstein.
Fennema said it was hard to say how the market would respond to new shorter-term paper without knowing the details of any such deal, but added: "The market hasn't seen a lot of supply in euros, so you would think there would be healthy interest."
"I think Sanofi's de-leveraging target is challenging and we could therefore see more significant issuance of long-term bonds further in the future," he said. A trader said there had been little talk about bond market supply as a result of the merger, with the main focus on the immediate credit impact on Aventis.