European credit markets generally rallied on Thursday, buoyed by a positive showing for stock markets, with aerospace firm EADS boosted by hopes of German government support. But in the high-yield market, bonds of telecommunications provider Damovo plunged as the company said it might not pay the next coupon on its debt.
Generally, though, the tone was strong. The iTraxx Crossover index, made up mainly of "junk" rated credits, fell 7 basis points to 262 basis points, a trader said. "We went in a straight line from 269 at the open to 262 now," he said. "There is nothing to stop it. Everyone is long, and we're going to go tighter."
However, the move, which has seen the Crossover index tighten 25 basis points since the start of October, is causing some to think back to a similar move in April, which was followed by a sharp sell-off in May.
Among single names, the cost of insuring the debt of Franco-German aerospace company EADS fell, after Hamburg's mayor, Ole von Beust, told reporters the German government had decided to buy a stake in the parent company of the crisis-hit planemaker Airbus.
But German chancellor Angela Merkel said that while Germany did not rule out taking a stake in the European aerospace firm, no final decision had been made on the matter. Five-year credit default swaps on EADS tightened 3 basis points to a 25.5 basis point mid-price.
Elsewhere, talk of private equity interest pushed up the credit protection cost of Schneider Electric, a French power and process controls equipment company. Five-year credit default swaps on Schneider rose 5 basis points to a 23.5 basis point mid-price, a trader said.
"There's some suspicion that this might be an LBO (leveraged buyout) target," he said, "This is not a very liquid credit, and it trades at very tight levels anyway, so it moves quite sharply when it's talked about."
Schneider Chief Executive Jean-Pascal Tricoire, asked about speculation over private equity take-over interest in Schneider, replied: "We have not had a formal approach."
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 53.1 basis points more than similarly dated government bonds at 1500 GMT, 0.4 basis points less on the day.
Bonds of telecommunications provider Damovo plunged as the company said it might not pay the next coupon on its debt and hired investment bank Houlihan Lokey to advise on strategic alternatives.
The company's 10.25 percent euro bond due 2012 fell 15 percentage points to around 42 percent of face value, traders in London said. Damovo said in a report issued to bondholders, a copy of which was obtained by Reuters, that as a result of cash flow problems in its Italian operations, it faced a decision over whether to pay the 18.9 million euro coupon on its bonds that falls due on October 30.
"We are reviewing our working capital requirements and considering all options to improve short-term liquidity," Damovo said. "These include considering all other sources of finance (whether or not currently permitted under our current covenant restrictions), deferring the payment of the October 30, 2006, payment on our notes and pursuing other alternatives."
"They've said with their results that they are considering deferring an interest payment," said one trader. "So people are thinking default and restructuring." Houlihan Lokey confirmed that it had been retained by Damovo to review strategic alternatives.
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