The cost of insuring the debt of Cadbury Schweppes Plc rose on Tuesday, after the world's largest confectionery group said US activist investor Nelson Peltz had built up a 3 percent stake, sparking talk he wanted to split the company up to unlock value. Five-year credit default swaps on Cadbury widened 10 basis points to a 48.5 basis point mid-price, a trader said.
Peltz's Trian Fund, which bought the Cadbury stake, has a reputation of buying shares in undervalued groups and pressuring management to perform better. In the wider market, the iTraxx Crossover index, seen as a key marker for sentiment about European credit, widened 11 basis points to 210.5 basis points, another trader said, on growing concerns about the US subprime mortgage market - the riskiest segment of the mortgage market, which services borrowers with poor credit histories.
"It's a slow slide. Nothing's really trading, everyone's watching headlines on subprime mortgages and reducing risk on that," he said. Shares of financial services companies with exposure to the mortgage market were among the biggest decliners in the US stock market, even though investment bank Goldman Sachs Group Inc had better-than-expected quarterly earnings.
Adding to the woes in the subprime market, New Century Financial Corp said the Securities and Exchange Commission is investigating the subprime mortgage lender's accounting. The company also said it was the target of a criminal probe by the US Justice Department. The New York Stock Exchange suspended trading of the shares.
Elsewhere, credit default swaps on British chemist chain Alliance Boots rose after the Times said KKR and Stefano Pessina, the company's executive deputy chairman, were weighing whether to make a higher bid for the company. Five-year default swaps on Boots rose 5 basis points to 150 basis points, a dealer in London said.
They fell on Monday after the board of Alliance Boots said it had rejected a 9.7 billion pound approach from KKR and Pessina. Moody's Investors Service said it may downgrade Alliance Boots' Baa2 rating following the take-over offer.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 46.0 basis points more than similarly-dated government bonds at 1541 GMT, 0.1 basis points more on the day. In the primary market, Telstra Corp, Australia's largest telecoms firm, set guidance on a 1 billion euro ($1.32 billion) 10-year bond it plans to sell, a banker familiar with the sale said. The bond is to be priced to yield around 60 basis points over mid-swaps, the banker said. Telstra last week hired Barclays Capital, BNP Paribas, Deutsche Bank and J.P. Morgan to manage the sale.
Proceeds from the issue will be used to refinance short-term debt. And French catering and services group Sodexho Alliance plans to issue a euro bond in the near future to refinance existing debt and for general corporate purposes, the banks managing the sale said on Tuesday.
Citigroup, HSBC, Natixis and SG CIB said the deal would follow an investor conference call to be held at 1015 GMT on Wednesday. A banker familiar with the deal said it would be of benchmark size and carry an intermediate maturity of up to 10 years. Benchmark euro bonds typically total a minimum 500 million euros ($659.2 million).
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