European corporate credit default swap spreads rallied on Monday to reach their tightest levels for the current index series, alongside firmer European equities where early signs of M&A activity helped boost sentiment. Swiss pharmaceutical company Novartis has said it plans to take full control of eye care group Alcon for $39 billion including a majority stake from Nestle.
"The ratings agencies had already factored in Novartis exercising its call option and with the minority stake set to be taken out via shares we see no impact on Novartis' ratings at this juncture," credit analysts at Royal Bank of Scotland said in a note.
Novartis has said it expects to fund the deal from available cash resources and up to $16 billion of external debt financing. The Royal Bank analysts said the deal was positive for Nestle. Five-year CDS on Nestle were about 4 basis points tighter at around 42.50 basis points, according to Markit data.
CDS spreads have rallied in the last few weeks of the year, with the Europe iTraxx index also reaching its tightest since July 2008, according to Markit data. By 1041 GMT, the investment-grade Markit iTraxx Europe index was at 72.50 basis points, according to data from Markit, 0.75 basis points tighter versus December 31. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 426.50 basis points, 5.50 basis points tighter.
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