The cost of default protection on French car parts group Valeo rose sharply on Friday amid speculation it may bid for assets of US car parts maker Visteon Corp five-year credit default swaps on Valeo traded 11 basis points wider at 73 basis points, a trader said, as investors bet the company was likely to incur a large chunk of debt if a bid went ahead.
"It's definitely a possibility that Valeo would go for this," said Cyril Benayoun, an analyst at BNP Paribas. "They have said they are looking at the US and have about 2 billion euros to spend, and there are Visteon assets they might like to pick up."
Auto parts maker Visteon, which is undergoing a massive restructuring, has hired investment bank J.P. Morgan Chase & Co to explore a possible sale of the company, a source familiar with the matter said late on Thursday.
Share and bond prices of Visteon leapt on reports of the move. The company averted bankruptcy in 2005 with a bailout by former parent Ford Motor Co, and is working on a three-year plan of additional facility sales or closings.
Also in autos, tyre maker Michelin was little moved by a Standard & Poor's ratings cut of one notch to BBB late on Wednesday. The rating agency cited weaker first-half earnings and said it may cut further, but five-year default swaps held steady at around 45 basis points, a trader said.
Elsewhere, European corporate bonds were little changed, amid busy two-way trading after US employment data that suggested the US Federal Reserve will not raise its key interest rate next month.
US employers added a smaller-than-expected 113,000 jobs in July and the unemployment rate jumped unexpectedly to 4.8 percent, Labour Department data showed, fuelling hopes for an interest-rate pause.
Corporate bond prices rose and stocks climbed while the dollar weakened against other major currencies as traders reckoned chances for an 18th straight interest-rate rise on Tuesday had lessened.
The iTraxx Crossover index, made up mostly of "junk" rated companies, was 3 basis points tighter at 265 basis points by 1415 GMT, a broker in London said.
A 53 percent rise in second-quarter operating profit and a consequent ratings boost to investment grade helped push down the price of default protection on HeidelbergCement, a trader said.
By 1403 GMT, credit default swaps on the company had tightened some 20 basis points on the day to 56 basis points. S&P said its upgrade to BBB-, the lowest investment-grade rating, from BB+ was driven by strong performance in the second quarter of 2006, thanks to cost cutting and favourable market conditions in Europe. The rating outlook is stable.
Portugal Telecom shifted slightly wider, with five-year default swaps trading at 180 basis points late on Friday, after Fitch Ratings downgraded the company to BBB, echoing similar moves from Standard & Poor's and Moody's Investors Service late on Thursday.
All the agencies said the cuts were prompted by plans to spin off media and Internet unit PT Multimedia to shareholders. The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 53 basis points more than similarly-dated government bonds at 1430 GMT, 0.4 basis points more on the day.
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