TDC bonds and default swaps were volatile on Wednesday, traders said, after the buyer of the company said unexpectedly it would redeem bonds as part of Europe's largest leveraged buyout.
Five-year credit protection on the Danish telecoms company opened at 325 basis points, then widened 20 basis points on the $12 billion bid as investors assumed existing bonds would be subordinated to new debt.
But it emerged the bonds would be redeemed, and buyers of protection evaporated, pushing default swaps as much as 80 basis points tighter, before eventually settling at about 265 basis points in late trade. That means it costs 265,000 euros to insure 10 million euros of the company's debt against default.
The highly unusual move to buy back the debt sparked a debate in the credit markets over the motivation for the decision by Nordic Telephone Company, the private-equity vehicle formed for the purchase of TDC.
"I suspect what has happened is they tendered for the bonds to avoid a fight with bondholders," said Tim Jagger, an analyst at RBS. "Ultimately they are going to have to return to the same people to refinance, so it makes sense to be nice."
Earlier this year, there was a protracted row between bondholders of ISS, a Danish cleaning services firm, and new private-equity owners after they refused to refinance the company's existing bonds, instead combining them with a pile of new debt used to buy the company.
TDC was also the focus of ratings agencies on Wednesday as Moody's Investors Service downgraded the company to "junk" status, and Standard & Poor's said it was likely to do so.
Moody's dropped TDC to Ba1 from Baa1 and said the rating remained on review for possible further downgrade. While existing bondholders had escaped the worst effects of the buy-out, the company could still expect to be heavily loaded with new debt, analysts said.
Apax Partners, Permira, The Blackstone Group, Providence Equity Partners and Kohlberg Kravis Roberts & Co bid 382 Danish crowns ($60.25) per TDC share, a 6 percent premium to its closing stock price on Tuesday, after months of bid speculation.
In autos, the cost of insuring debt in General Motors Acceptance Corp (GMAC), General Motors' finance arm, rose after Bloomberg News quoted Bank of America Corp's chief financial officer as saying BoA would rather not buy the finance unit.
GM plans to sell a majority stake in GMAC to help the unit regain an investment-grade credit rating, which would allow it to raise funds far more easily. Analysts have cited Bank of America as a potential buyer.
Five-year credit default swaps on GMAC stood about 20 basis points wider, bid at 440 basis points, a trader said. That means it costs 440,000 euros a year to insure 10 million euros of the company's debt against default.
Debt in parent company GM and rival Ford Motor Co was little changed, a second trader said. Analysts surveyed by Reuters last week said the pair were likely to report US sales declines of as much as 15 percent, following a 23 percent slump in sales in October.
French utility Veolia Environment sold 1.5 billion euros of bonds in two parts on Wednesday, the banks managing the sale said.
It sold a 600 million euro bond due 2020 at 98.946 percent of face value with a coupon of 4.375 percent, at a spread of 105.2 basis points over Bunds, equivalent to 70 basis points over swaps. It also sold a 900 million euro bond due 2016 at 99.526 percent of face value with a coupon of 4 percent, at a spread of 63.5 basis points over Bunds or 49 basis points over swaps.
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