European corporate bonds rallied further on Wednesday as traders continued to cover short positions and some investors added to positions, although a downgrade of airline SAS dented sentiment in high-yield. A restructuring agreement between automaker Ford and parts maker Visteon was broadly welcomed as reducing uncertainty over the issue, in much the same way as Fitch Ratings' decision to cut General Motors to "junk" helped clear the air earlier in the session.
Ford's bonds bounced on news of the deal, which will see 20 plants and 17,400 workers return to the automaker from Visteon, which was spun off from Ford in 2000.
"There is a negative financial impact, but this clears a lot of the uncertainty out of the market," said one banker.
Ford's 4.875 percent 2010 euro bond was up 0.5 percentage point to be bid at 89 percent of face value after the news emerged, he said.
Industrial bonds saw strong buying, a trader in London said, as investors looked to cover short positions and increase bets that the worst of the recent selling may be over.
Italian aerospace group Finmeccanica saw its 4.875 percent bond due in 2025 trade 8 basis points tighter, bid at 139 basis points over government bonds, the trader said. French cement maker Lefarge also attracted attention, its 4.75 percent note due in March 2020, 20 basis points tighter at 120 basis points over Bunds.
"Its a massive buying day in industrials," said the trader. "We are seeing a lot of client buying coming back into the market - you never know, this could be the turnaround."
Elsewhere, the cost of default protection on a swathe of industrial and media names declined as sellers looked to increase their exposure to credit risk.
Five-year default swaps on Dutch publisher VNU fell three basis points to 65 basis points, according to HSBC data, bringing its five-day decline to 20 basis points.
Five-year default swaps on French telecoms and media group Vivendi fell 5 basis points to 60 basis points, while chemical maker Ciba Speciality saw its cost of protection fall 3 basis points to 40 basis points.
The high-yield market was in positive territory, another trader said, but the tone had softened with a downgrade by Moody's Investors Service of airline SAS's ratings deeper into "junk" territory.
Moody's cut SAS's senior unsecured issuer rating to B3 from B2, and said the outlook was negative due to increased competition from low-cost airlines and high fuel costs.
German sugar refiner Suedzucker AG plans to issue a rare perpetual euro bond, with a roadshow set to start on June 6, lead manager Deutsche bank said on Wednesday. The bond will be callable and feature a coupon that increases if the deal is not called, the bank said.
Elsewhere in the primary market, Dutch mail and logistics company TNT NV priced a bond exchange, issuing 400 million euros of new 10-year bonds and accepting tenders of 354 million euros of existing bonds due 2008. Citigroup and Deutsche Bank managed the exchange.
And German reinsurer Hannover Re sold a 500 million euro perpetual bond as part of a deal to replace existing debt due 2031 with new paper, lead manager J.P. Morgan said. The 5.0 percent bond, callable in 2015, was priced at a spread of 168 basis points over swaps, in line with guidance. Bondholders tendered 212 million euros of the outstanding paper.