M&A risk broke the summer calm in the credit market on Thursday, with cable operator NTL volatile on a potential private equity bid and car parts maker Valeo moving sharply wider on a possible bid for Visteon.
"Event gossip has returned with a vengeance, which should not surprise given that equity markets are in rude health and interest rate risks seem much better contained after yesterday's numbers," Royal Bank of Canada wrote.
Five-year default swaps on NTL moved in a 30-basis point range on Thursday but were close to unchanged at 395-400 basis points by mid-afternoon, dealers said.
They initially widened to 425 basis points after sources close to the deal said that four private equity firms were working on a 10 billion pound take-over approach for NTL.
But one source said there were no structured talks going on, and no formal process had started. "Presumably this just goes backwards and forwards again now," one trader said of the CDS price. "It's come all the way back in again this afternoon." Elsewhere, the cost of insuring against a default by French car parts maker Valeo rose sharply on Thursday as talk persisted that the company is interested in bidding for US auto parts maker Visteon.
Five-year default swaps on Valeo rose 18 basis points on the day to 87 basis points, dealers in London said. "It's because they're apparently involved in the first round of bids (for Visteon)," one of the dealers said.
Valeo on Thursday again declined to comment on speculation that it is interested in buying Visteon, which a source familiar with the matter has said hired investment bank J.P. Morgan to explore its strategic options.
Valeo said on August 4 it would not discuss any interest in Visteon but reiterated it was examining all automotive assets that come on to the market. Visteon said on Thursday it had put two of its five plants in Germany up for sale in a move that will halve its German workforce of 2,800 employees.
And Volvo credit default swaps suffered too, moving 8 basis points wider to 46 basis points, after a newspaper report that an investment fund was trying to drum up interest in a bid for the Swedish truckmaker.
New York-based Swedish financier Thomas Sandell is trying to pull together interest among Swedish investors for a bid for Volvo or to pressure its management to boost shareholder payouts, newspaper Dagens Industri quoted sources as saying.
Sandell runs Sandell Asset Management, which owns a hedge fund called Castlerigg.
The broader market was calmer, with the iTraxx indices continuing to edge tighter thanks to US data earlier this week that calmed fears over inflation.
The iTraxx Crossover index, made up mostly of "junk" rated credits, was 4 basis points tighter at 247 basis points while the iTraxx Europe index of 125 investment-grade credit default swaps moved 0.5 basis points tighter to 27.5 basis points.
"I think people are slowly making up their mind that the Fed is done," said one credit strategist. "Now the market needs to make up its mind whether the economy is going to slow to trend growth or beyond that.
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