Dutch retailer Ahold provided a spark of interest in the European corporate bond markets on Thursday, with the cost of insuring against a default by the company dropping as it sold two US retail chains. Elsewhere, traders said brokers' screens were mostly blank, with only a couple of prices being quoted ahead of Christmas. Ahold said on Thursday it had agreed to sell its Bruno's and BI-LO retail chains in the United States to Lone Star Funds for $660 million, slightly below market expectations.
Ahold, the world's fourth-largest food retailer and food services group, is selling the assets to help raise at least 2.5 billion euros from disposals as part of a recovery plan following an accounting scandal that broke in February 2003.
Five-year default swaps on Ahold initially fell seven basis points to around 115 basis points before trading back to about 121 basis points, just one basis point less on the day, a trader said. The price means it costs 121,000 euros a year to insure 10 million euros of Ahold debt against default.
"The value they've got for it has been below some expectations in the market, so that's why it hasn't rallied massively," the trader said. "Also, deleveraging is coming to an end. After this, what's going to drive the momentum for Ahold?"
Ahold is still rated in the speculative-grade category, meaning many bond investors are barred from investing in the company's debt.
It is rated BB by both Standard & Poor's and Fitch Ratings, two notches below investment grade, and an equivalent Ba2 by Moody's Investors Service.
In the investment-grade markets, activity had virtually ground to a halt.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 48.0 basis points more than similarly dated government bonds at 0905 GMT, 0.1 basis points more on the day, but down from 63.8 basis points at the end of 2003.
A combination of low corporate bond issuance, investors' strong cash balances and a benign credit environment have driven investment-grade spreads tighter in 2004. It has been a similar story in the European high-yield market, where yields have fallen consistently, and records have been broken for the largest-ever deal and the lowest-ever coupon.
In underlying government bond markets the yield on the interest rate sensitive two-year Schatz was 2.439 percent, 0.3 basis points less, while the 10-year Bund was yielding 3.597 percent, 0.3 basis points less on the day. The 10-year euro swap rate was 3.660 percent.
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