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The European corporate primary market saw its first bond deal for five weeks on Friday, with a 1.9 billion euro ($2.6 billion) two-part issue from GDF Suez even as speculative-grade spreads hit record wides. By 1132 GMT the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 761.5 basis points, according to data from Markit, about 26.5 basis points wider on the day.
The index had hit a record wide of 770.5 basis points an hour earlier. The investment-grade Markit iTraxx Europe index also widened by some 9.5 basis points to 144.5 basis points, having hit 147.5 basis points earlier. It is still below record wides of 166 basis points hit in mid-March. "People are just giving up. European equities are up, but US futures are pointing down. There is no liquidity," said a trader.
Simon Ballard, a senior portfolio manager at Fortis Investments, said the unwind of collateralised debt obligations (CDOs) may have pushed investment-grade spreads wider. There is also general malaise after a turbulent week in financial markets, he added.Mehernosh Engineer, a credit strategist at BNP Paribas, said there was also some nervousness ahead of the cash settlement of credit default swaps on Lehman Brothers next Tuesday.
After the netting of exposures following a CDS auction last week, there is about $8 billion in protection to be paid, which strategists are speculating could hit some hedge funds hard. "There is apprehension whether the adequate amount of cash has been raised," said Engineer.
Despite the volatility, the primary market for corporates reopened at last after a five-week long shutdown, boosting hopes that others may follow and that companies will find it easier to tap the bond market for much-needed cash in coming weeks.
Guidance on GDF Suez's five-year 1 billion euro deal has been set at mid-swaps plus 200 basis points, from initial guidance of 200 basis points area. Guidance on the 10-year 900 million euro bond has been set at mid-swaps plus 240 basis points, revised from 240 basis points area, an official at one of the banks managing the sale said.
Lloyds TSB also plans to sell a 10-year sterling benchmark bond, one of the leads said, while triple-A rated KfW plans to increase its recent 2.5 billion euro deal by 500 million euros, according to IFR, a Thomson Reuters publication.

Copyright Reuters, 2008

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