Egg bonds gain as sale talks end; TUI rallies

Bonds of Internet bank Egg made strong gains in the European corporate bond market on Tuesday as parent Prudential said it had failed to find a buyer for the bank willing to meet its price demands.
Talks over Prudential's 79 percent stake in Egg had dragged on since January, as talks stopped and started with a range of potential buyers. Some had feared that a sale could mean sharp cuts in Egg's credit ratings, forcing some investors to bail out of the bonds.
"We have had a big relief rally because there was a concern that a purchase might have happened that would have led to the junking of their upper Tier II and possibly lower Tier II bonds," said one trader.
The bank's 6.875 percent sterling bond due in December 2021 was trading about 25 basis points tighter at 140 bps over government bonds. The bond is callable in 2016.
The bonds are "likely to drift tighter over the coming weeks now that the threat of an acquisition by a US monoline has receded," said analysts at J.P. Morgan in a note to clients.
Credit ratings agency Fitch Ratings affirmed Egg's A+ long-term rating on Tuesday, saying the rating outlook was stable based on the support available from Prudential. The tone in the broader market was flat to positive. The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 50.8 basis points more than similarly dated government bonds at 1500 GMT, 0.3 basis point less on the day.
Bonds of German travel firm TUI AG gained and the cost of insuring against a default by the company fell as it promised a hefty rise in profit this year.
"The outlook for 2004 is very promising. The booking trend in the current summer season is positive," TUI said in a statement.
TUI's 6.625 percent euro bonds due 2011 were trading around 0.5 percentage points higher on the day, bid at 100.75 percent of face value, a trader said. Five-year default swaps on TUI meanwhile fell 10 basis points to 275 bps, meaning it costs 275,000 euros a year to insure 10 million euros of debt against default. "TUI's quite a bit stronger. There's been a decent amount of flow after they came out with the preliminary comments," said the trader.
TUI's bonds are unrated, but are traded like high-yield debt in the market. The company has said it wants to extend the maturity of its debt in order to achieve an investment-grade rating in the medium term.