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EUR CDS Flow - Crossover names widen as weaker tone persists
Informa Global Markets - Bondwatch Morning Insight (Europe) (June 8, 2007)

There was a pick-up in market activity on Thursday as the single name CDS market continued to widen and the iTraxx Crossover index pushed past the 200 level.

In the single names there were a handful of movers that stood out, mainly coming from the Crossover sector. The early move was 5Y CDS on FKI which initially went 10bp wider after the company said that it was in discussions with only one bidder for the company. Shares in the company fell 9.7% on Wednesday's close and reports said that investors were disappointed that an auction did not result from the strategic review. The company announced that it would separate its Hardware and FKI Logistex businesses after reporting that FY operating income before special items rose 5.3% Y/Y to GBP 100.6mln, while pre-tax profit fell 7.4% to GBP 65.3mln. By the end of the day 5Y CDS on FKI had moved tighter to 130/140 (-5bp D/D).

Another large but puzzling move in the morning was 5Y CDS on Rhodia which traders said jumped 30bp wider following a 14% drop in its share price. Source said that rumours of a profit warning and speculation of corruption had caused the moves but Rhodia said that these rumours were completely unfounded and it had no information on why its shares fell. 5Y CDS on Rhodia ended at 130/140 (+15bp D/D).

Elsewhere in the sector 5Y CDS on Ahold was 1bp wider at 49/52 after it said that Q1 operating income fell 0.7% Y/Y to EUR 421mln and Norske Skogindustrier was 12bp wider at 120/130 after it said it planned to launch a 10yr euro denominated bond and would use the proceeds to refinance debt.

One of the main stories of the day came from the TMT sector when Vodafone said that activist shareholder group ESB had submitted four motions to be put to the annual general meeting on 24-Jul. ECS was asking the company to take steps to release between GBP 17-38bln of value for shareholders and improve Vodafone's inefficient capital structure. 5Y CDS on Vodafone was 1bp wider at 22/24 whilst shares were up as much as 3.54% on Wednesday's close, but many contacts played down the strength of the activists proposals stating that the group did not hold a big enough stake and lacked credibility. Elsewhere 5Y CDS on France Telecom was flat at 17/20 as was Deutsche Telekom at 21/24 after the French company agreed to buy Deutsche Telecom's Spanish internet unit for an enterprise value of EUR 320mln. The other mover in the sector was 5Y CDS on KPN which was 1bp wider at 41/44.

In the Energy sector 5Y CDS on Kelda edged 1bp wider to 22/25 after the company reported that FY operating profit from continuing operations rose 7.2% Y/Y to GBP 338.2mln, which was in-line with expectations. Recently, Kelda had been the subject of leveraged bid speculation, though such a rumour had been around for a while.

The Industrial sector was flat but 5Y CDS on BAE was 1bp tighter at 15/17 after the UK Prime Minister Tony Blair said that he stood by his decision to drop a corruption probe in to the company following a report that said BAE had made more than GBP 1bln of secret payments to Saudi Arabia.



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