ISS bonds, CDS hit hard by private equity bid

A bid for Danish cleaning and services company ISS jolted European bond markets on Tuesday as fixed income investors worried about higher debt levels and the near certainty of credit rating cuts. Goldman Sachs Capital Partners and venture capital firm EQT bid 22 billion Danish crowns ($3.84 billion) for the company. While the deal was welcomed by equity investors, holders of the company's outstanding bonds saw prices plunge on fears that the new owners would issue more debt to help pay for the acquisition, straining ISS's balance sheet. Ratings agency Standard & Poor's said it could cut the company's rating.
"We expect the acquirers to increase leverage in the group as much as possible," Nordea said in a note.
"The roof for the debt level (or the floor for the implicit rating) is likely to be what level of risk lenders will accept. Based on this reasoning, we expect the floor for the rating to be single B."
The cost of insuring against a default by ISS, currently rated BBB+, rocketed.
Traders quoted ISS's five-year credit default swaps at around 370 basis points, close to 300 basis points more on the day and meaning it costs 370,000 euros a year to insure 10 million euros of ISS debt against default. The price had earlier risen as high as 400 basis points.
The company's 2010 and 2014 euro bonds fell to 90 and 78 percent of face value, respectively, from around par, traders said.
"It's come to the level where we've started to see buyers from high-yield and there's a strong retail bid," said one trader. "It's not reversing the fall but it has stopped it for now."
Private equity bids are usually financed by loading debt on the balance sheet of the company being acquired, reducing its credit quality.
In the wider market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 52.8 basis points more than similarly dated government bonds at 1618 GMT, 0.4 basis points more on the day.
"We started to push wider in the morning session but we've since firmed up," said one auto trader, with spreads on US automakers' euro bonds around five basis points wider on the day by 1425 GMT.
Elsewhere, the cost of credit protection on France's Alcatel rose ahead of a statement expected after the market close of the company's earnings under new European accounting rules.
The company will announce last quarter earnings under the IFRS rules later on Tuesday and hold an analysts call on Wednesday. Earnings under local GAPP accounting rules, reported last month, were below expectations.
Five-year credit default swaps on the company traded four basis points higher at 84 basis points ahead of the statement, according to HSBC pricing.