BAA's debt rallied on Tuesday, as bondholders shrugged off a take-over bid amid speculation any new owner of the world's largest airport operator would buy bonds back at full cost once a take-over is completed.
In the wider market, Europe's main credit default swap indexes were sapped by falling equity markets, which were weakening as US shares opened marginally lower and nagging interest rate worries continued to hinder European stocks. BAA agreed to a 10.1 billion pound ($18.9 billion) take-over bid from a consortium led by Spain's Grupo Ferrovial, rejecting a higher offer from Goldman Sachs.
But debt investors bet that "change of control" clauses in the company's 2012, 2018 and 2023 bonds would be triggered if a rating agency downgraded BAA to "junk" status within 90 days of a take-over.
BAA agreed to include the clauses into the terms of the newly sold bonds earlier this year after news of Ferrovial's interest emerged.
Five-year credit default swaps on BAA tightened some 7 basis points to be bid at 39 basis points, a trader said, meaning it costs 39,000 euros a year to insure 10 million euros of the company's debt against default.
"There's a rumour circulating that there's no downgrade risk and they're going to retire all the debt and issue new bonds ... so that's why everybody's rushing to buy bonds," he said.
The spread on the 2012 bonds tightened about 15 basis points to 53.5 basis points over government bonds, a second trader said, and the 2018 bonds' spread tightened 18 basis points to 79 basis points.
The remaining $6.9 billion of BAA bonds not covered by the most recent clauses also rallied, as investors bet any action taken over the protected bonds would apply across the board.
In the wider market, the iTraxx Crossover index, made up mainly of high-yield credits, widened 7 basis points, bid at 262 basis points, while the iTraxx Europe index of 125 investment-grade credits was about 1 basis point wider, bid at 32 basis points, an index trader said.
The FTSEurofirst 300 stood 1.6 percent lower by 1501 GMT at 1284.27 points, while the Dow Jones Industrials dipped below 11,000 points for the first time since March 10. Syndicate bankers were working on a slew of new bond sales.
Dutch gas network operator Nederlandse Gasunie plans to sell a 10-year bond of at least 500 million euros this week, two officials at banks managing the sale said, priced to yield 11 to 14 basis points over mid-swaps.
One of the officials said Gasunie could also sell a smaller 15-year euro bond, depending on investor appetite. Officials at the lead managing banks also announced deals from French retailer PPR; Volkswagen Bank; Finnish utility Fortum, and French securities firm Oddo & Cie.
And British property group Hammerson will wrap up investor roadshows for its planned benchmark-sized euro bond on Thursday, a banker familiar with the deal said.
Meanwhile, Spain's Telefonica plans to follow its euro and sterling bond sale earlier this year - which was Europe's largest telecoms bond sale in three years - with the sale of $4 billion of dollar bonds in a four-part deal.
Five-year credit default swaps on Telefonica rose 2 basis points to 41 basis points, a telecoms trader said.
The dollar bond sale is also to help refinance Telefonica's 17.7 billion pound purchase of UK mobile operator O2. It will include a three-year floating rate note (FRN) and five-, 10- and 30-year fixed-rate bonds, lead managers Citigroup, Credit Suisse, Deutsche Bank and Lehman Brothers said.