Debt in German specialty chemicals firm Degussa fell on Tuesday, on fears of a buyout that could send the company's bonds to "junk", while General Motors bonds traded lower after a ratings cut from Standard & Poor's.
The cost of insuring debt in Degussa against default jumped and its bonds fell in price after a report that German mining group RAG plans either to sell its stake in the company or completely take it over.
The comments from RAG's Chief Executive Werner Mueller, in an interview with Die Welt newspaper, fuelled speculation that Degussa could be subject to a private equity leveraged buyout (LBO), a trader said.
Five-year credit default swaps on Degussa rose to as much as 140 basis points, before retrenching to stand 15 basis points higher at 125 basis points.
"Such a move to divest the stake would represent a complete change in RAG's strategy but also introduce other variables into the Degussa equation and LBO story," Societe Generale strategist Suki Mann wrote in a note to clients.
Degussa's 5.125 percent bond due 2013 rose some 30 basis points, bid at 185 basis points over equivalent government debt, a second trader said.
Bondholders have grown increasingly wary of LBOs this year as ever-larger private equity funds have eyed European corporate targets. LBOs are funded by borrowing heavily in a target company's name, typically prompting a steep slide in its creditworthiness.
Elsewhere, bonds of General Motors held onto earlier losses registered after S&P cut its credit rating on the loss-making US auto maker two notches late on Monday, and said bankruptcy was not "far-fetched".
GM spokeswoman Gina Proia said the automaker has no strategy or intention to declare bankruptcy.
General Motors' 8.375 percent euro bond due in July 2033 traded about two points lower, bid at 70 percent of face value, traders said.
"It's not great news. People are now waiting to see some news on the sale of GMAC," a trader said.
General Motors plans to sell a majority stake in General Motors Acceptance Corp (GMAC) to restore the financing arm's investment-grade credit rating and its access to cheap funding, and has set a Monday deadline for initial bids.
The rating agency cut GM's corporate credit rating by two notches to "B", five steps below investment grade, from "BB-minus." The outlook is negative, meaning the rating is likely to be lowered again over the next 2 years.
General Motors, with some $103 billion of bond debt denominated in all the major currencies, is a bellwether for the credit markets.
The wider market weakened, with the FTSE Euro Corporate Bond Index showing investment-grade corporate bonds in euros yielding an average 42.9 basis points more than similarly-dated government bonds at 1624 GMT, 0.9 basis points more on the day.
In the primary market, a company official said British American Tobacco would wait for a key US court ruling before concluding its planned sterling bond sale, intended to refinance maturing debt.
The Illinois Supreme Court will rule on Thursday on a $10.1 billion verdict against Philip Morris USA, in a case in which the largest US cigarette maker was found to have fooled smokers into thinking "light" cigarettes were healthier than regular cigarettes.
The Philip Morris ruling will be closely watched by investors in BAT, the world's second biggest cigarette maker, because it will form the basis for a similar court judgement in a case involving former BAT unit Brown & Williamson.
In the high-yield market, German packaging company Gerresheimer Glas plans to sell 60 million euros of bonds to fund the purchase of a pharmaceutical packaging business from Denmark's Superfos AS, a banker familiar with the deal said.
The bond sale will be an increase of the 150 million euro ($178.8 million) 10-year, 7.875 percent bond that Gerresheimer sold in February.
J.P. Morgan is managing the deal, which will price on Thursday after an investor meeting on Wednesday, the banker added.