Bid talk around Continental pushed its cost of default protection higher on Tuesday, before excitement faded when the German tyre and auto parts maker said it was not aware of any offer.
Five-year credit default swaps on Continental traded as much as 20 basis points wider at 70 basis points, a trader said, and its shares rose more than 5.5 percent on a rumour that a private equity group was running a ruler over the company. With the company dousing the speculative frenzy, CDS pared their rise to trade late in the day at 60 basis points, the trader said.
"Continental was the biggest mover but overall it's been pretty dead," a trader in London said. "We are once again grinding tighter as a sort of reflex." There has been repeated speculation that Continental could be a target for cash-rich private equity funds. Credit markets dislike leveraged buyouts because they are funded by loading the target's balance sheet with debt.
Elsewhere, merger and acquisition talk was again to the fore, in a market bubbling over with bid chatter in recent weeks. Germany's E.ON's long-running take-over bid for Spanish power giant Endesa, contested by Italy's Enel and Acciona, reached a compromise ending, with E.ON giving up its 42-billion-euro bid and agreeing to carve the company up with its rivals.
Five-year CDS on E.ON fell one basis point to 11.5 basis points, a dealer said, while those on Enel rose one basis point to 13.5 basis points. "In terms of ratings we expect a maximum one-notch downgrade for E.ON to A+, while Enel, who will have to buy the bulk of the Endesa shares, could see their rating slip to mid-single-A," said analysts at the Royal Bank of Scotland, in a note to clients.
The cost of default protection on DaimlerChrysler held steady, an auto trader said, ahead of a shareholder meeting slated for Wednesday, which may give further clues on a possible sale of the company's Chrysler unit.
Five-year Daimler protection was trading at about 37 basis points, the trader said, about 3 basis points wider than a week ago, when it rallied on speculation over a possible sale. In index trading, the iTraxx Crossover index, made up of 50 mostly "junk"-rated companies, tightened about 6 basis points to 223 basis points, a trader said. The investment grade iTraxx Europe was little changed at 24.5 basis points, he said.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 46.2 basis points more than similarly-dated government bonds at 1600 GMT, 0.2 basis points less on the day. French sugar producer Tereos cut the yield on its 400 million euro ($534.2 million) 7-year bond after heavy demand led the deal to be oversubscribed, an official at sole lead manager Calyon said on Tuesday. The bond will be priced to yield 6.375 to 6.5 percent, the official said, less than guidance of 6.5 to 6.75 percent given on Monday.