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EUR CDS Flow - Alcatel jumps wider as it cuts forecast
Informa Global Markets - Bondwatch Morning Insight (Europe) (September 14, 2007)

Traders said that the market was pretty quiet on Thursday as traders looked ahead to the roll of the iTraxx indices and the FOMC rate decision next Tuesday. In general CDS levels were tighter, helped by an increase in equities and a smaller than expected jobless figure in the US. In the single names there were a couple of large moves amongst a relatively stable market.

The first big move of the day came from the Crossover sector when Alcatel-Lucent said that it had cut its FY revenue forecast to flat to slightly up at constant FX. This was down from its previous estimate of mid-single-digit growth. It added that the change in revenue mix was expected to negatively impact the profitability of the company, especially in the current quarter (Q3), where operating income was expected to be around breakeven. The revision was a result of lower-than-expected capital spending by some of its wireless customers in North America. 5Y CDS on Alcatel-Lucent widened as much as 30bp, but was last seen at 220/240 (+25bp D/D), and its shares fell 14% on the news. Elsewhere in the sector 5Y CDS on Norske Skogindustrier was flat at 310/335 despite the company announcing that it was cutting production by 200,000 tones in 2008, though it did say that this would have a positive earnings impact.

The other big move of the day came in the Industrial sector as 5Y CDS on Hanson shot out 38bp wider to 95/105 following the announcement that HeidelbergCement was changing the financing structure in its takeover of Hanson. Heidelberg said that Hanson would provide a general guarantee for all of its liabilities, which would expire when Hanson's dollar bonds are repaid, exposing Hanson to Heidelberg's debt in the short-term. Traders said that this did increase the risk in Hanson and if the guarantee was an "unconditional irrevocable guarantee" then it was expected that 5Y CDS on Hanson and Heidelberg would trade at exactly the same level. 5Y CDS on HeidelbergCement was 2bp tighter at 121/125 and contacts said that the differential between the companies" spreads would narrow.

Also moving tighter was 5Y CDS on AstraZeneca, which was 1bp tighter at 27/31, following the pricing and allocation of its new EUR 750mln issue. A contact said that CDS tightened following a sell-off in its protection from hedge funds which did not get the bond allocations they had expected. Elsewhere in the sector Finmeccanica said late on Wednesday that H1 EBIT rose 3% Y/Y whilst net profit fell and also set out its target for 2010. 5Y CDS on Finmeccanica was flat at 37/39. CS



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