British leisure group Rank came under pressure in the European bond markets on Tuesday, amid rumours of a private equity bid that would potentially load the company's balance sheet with debt.
While no firm evidence of a bid was forthcoming, five-year credit default swaps on Rank rose 19 basis points to be bid at 155 basis points. That means it costs 155,000 euros ($190,300) to insure 10 million euros of debt against default.
One British newspaper report named US private equity giant Blackstone as the bidder. The group declined to comment.
"Rank was the big mover this morning and then stayed at its wide levels," said a trader in London. "The rest of the market is up."
The broader credit market rallied on speculation that dealers were selling structured products, after demand rose following recent spread widening, said another trader.
Structured investments such as collateralised debt obligations (CDOs) enable investors to express views on baskets of debt within a larger portfolio. Selling of new structures often boosts demand for credit as banks look to hedge their portfolio exposure.Telecom bonds were among the biggest beneficiaries, the trader said, as the sector often accounts for large chunks of CDOs.
Five-year default swaps on France Telecom traded around a basis point tighter bid at 36 basis points, the trader said, while Deutsche Telekom and Telecom Italia logged similar gains.
"We are approaching quarter-end and dealers are looking to get out there and sell," the trader said. "The margins are skinny but there is something in it for them."
The iTraxx crossover index of credit default swaps traded at 272 basis points late on Tuesday, around 10 basis points tighter on the day, according to HSBC data.
In the cash market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 36.9 basis points more than similarly dated government bonds at 1449 GMT, 0.3 basis points less on the day.
Earlier, bonds of French telecoms and media group Vivendi Universal rallied after it beat analysts' forecasts. Vivendi's 3.875 percent bond due February 2012 tightened one basis point, bid at 72 basis points over government debt, a telecoms trader said, after it posted a 34 percent rise in first-half operating profit, driven by telecoms sales and newly found strength at its music business.
In the primary market, German luxury carmaker BMW increased the size of its planned 5-year bond to 1 billion euros and refined price guidance on the deal to 17 basis points over swaps, a source familiar with the deal said on Tuesday.
The bond size was increased from earlier guidance of about 750 million euros ($920.9 million), and the spread is at the tight end of earlier talk of 17-18 basis points over swaps - both signs of good demand. BMW is issuing the bond to refinance existing debt. Pricing is expected later on Tuesday.
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