The price of default insurance on Iceland's major banks fell on Monday after Moody's Investors Services upgraded them and many other banks on the assumption that governments would rescue them should they get into trouble.
Elsewhere, continuing jitters over a potential leveraged buyout pushed default swaps on Sainsbury wider, while Portugal Telecom CDS rallied amid speculation a take-over was becoming less likely.
"The Icelandic banks are getting a big boost from the Moody's thing," said a trader in London. Moody's upgraded a string of European banks over the weekend thanks to its new joint default analysis methodology, which looks at the likely government support available.
It upgraded Iceland's Glitnir and Kaupthing to Aaa from A1, and Landsbanki to Aaa from A2. Five-year default swaps on Kaupthing have fallen 13 basis points to 24.5 basis points since Thursday, the trader said, while those on Glitnir fell around 10 basis points to 20 basis points. Moody's policy change was met by incredulity among analysts, who questioned the validity of ratings that take into account potential state intervention.
Among a volley of negative comments, analysts at Royal Bank of Scotland described the impact of Moody's methodology as an "unspeakable horror" that might make the agency's ratings redundant.
"While defaults in European banking have not exactly been legion in recent years, creating Aaa-rated banks across the board essentially means that there is no risk in investing in financials, that buying a senior Kaupthing bond, for example, is effectively risk-free, the same as Gilts or Bunds," they wrote. "It is plainly not." The cost of default protection on Portugal Telecom fell on Monday after a report on Friday that hedge fund Paulson & Co does not plan to tender its shares in the company to smaller Portuguese rival Sonaecom.
Five-year credit default swaps on Portugal Telecom tightened 6 basis points to 85 points, said a trader. Paulson, which declined to comment on the Reuters report, owns a little more than 2 percent of Portugal Telecom shares. Sonaecom has offered to buy its larger rival for 10.5 euros a share, or about 11.8 billion euros ($15.47 billion).
In otherwise subdued trading, the iTraxx Crossover index continued Friday's move higher, ending the day 2 basis points wider at 178 points. The iTraxx Europe index was 0.25 basis points tighter at 20.75 basis points bid. Five-year default swaps on supermarket chain Sainsbury rose 5 basis points to 105 basis points on concern over a private equity bid.
The Sunday Times cited a source close to the consortium of KKR, Texas Pacific Group, CVC and Blackstone Group as saying it could make an 11 billion pound bid this week, though the timetable could slip. Tesco, Britain's biggest retailer, plans to issue a 50-year sterling bond, the banks behind the deal said on Monday, in one of the longest-dated deals in the sterling corporate bond market.
A banker familiar with the deal said Tesco received more than 2 billion pounds of investor orders within hours of the 500 million pound deal's announcement, allowing it to trim the premium on offer to buyers. The bond's spread was cut to 117 to 120 basis points over the December 2055 UK government gilt, the banker said, from an original 120 to 125 basis points. The deal could conclude as early as Monday, the banker added.
The bond will rank alongside only a handful of other 50-year sterling corporate bonds, including a 2002 deal from French rail network operator Reseau Ferre de France (RFF), a 1994 bond issue from British Gas, and a trio of deals from British utility borrowers over the last year.
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