The cost of insuring debt from some of Europe's biggest telecoms and media companies, including France Telecom and Bertelsmann, against default through credit derivatives hit record lows on Thursday.
While wider market indexes such as the "junk"-tracking Crossover index pared gains after rallying sharply this month, credit default swaps (CDS) on some companies hit the lowest levels since they began trading widely two to three years ago.
Five-year default swaps on Germany's Bertelsmann, France Telecom, and Greek telecoms company OTE tightened to 22.5, 24 and 29.5 basis points respectively, a telecoms trader said - all lower than their previous closing lows, according to GFI data.
Those prices mean it costs, for example, 29,500 euros a year to insure 10 million euros of debt from OTE against default. Jim Reid, a credit strategist at Deutsche Bank, said investor eagerness for yield had helped compress spreads in the tech, media and telecoms sector, which lagged the wider market for much of 2006.
But the iTraxx Crossover, a bellwether for sentiment about riskier European credit which has rallied some 30 basis points this month, widened about 3.5 basis points from its low this morning to 195.5 basis points, a second trader said.
Elsewhere, default swaps on the United States' two biggest automakers, General Motors and Ford, both fell as credit investors cheered news from the two companies. Five-year credit default swaps on Ford fell 14 basis points to a 448 basis point mid-price, the second trader said, while those on GM fell about 6 basis points to 324 basis points.
Ford reported a fourth-quarter loss of almost $5.8 billion but surprised analysts with a quarterly cash burn of $1.8 billion, less than some had expected. GM said it was looking at strategic options for its Allison Transmission unit, including a possible sale, adding it "continues to have a strong liquidity position", with more than $20 billion of cash and marketable securities at the end of the third quarter.
In the primary market, a new hybrid bond from Austria's Wienerberger was set to tighten 10 basis points in initial trading, traders said, underscoring investor appetite for high-yielding hybrid bonds, which blend characteristics of equity and debt.
Wienerberger, the world's largest brickmaker, was set to price the larger-than-expected 500 million euro bond later on Thursday, an official at one of the lead managers said. This is the first corporate hybrid bond issued in Europe this year and follows a relatively meagre start to new corporate euro bond sales in general in 2007.
Price talk for the Austrian company's bond, which is perpetual and not callable for the first 10 years, was 237.5 basis points over mid-swaps, the official said. Corporate hybrid bonds, which took off after a rating agency re-think in 2005, are treated partly as equity by the rating agencies and pay investors a higher return than standard debt because they carry some risks normally associated with shares.
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