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EUR CDS Flow - Lack of bad news keeps spreads tightening
Informa Global Markets - Bondwatch Morning Insight (Europe) (October 5, 2007)

The CDS market continued to tighten on Thursday with traders citing a general lack of bad news as the reason behind this recent strengthening in credit spreads. One contact said that with equities close to the years highs there may be a re-coupling of credit spread and equity strength. Amongst the single names traders said that the market was very quiet with little activity.

The main talking point of the day was the announcement from HeidelbergCement of a new issue, which did cause spreads to move, but generally left the market under whelmed, contacts said. 5Y CDS on HeidelbergCement was 10bp tighter at 95/100, with trade seen at 100, following the announcement of the new 10 year EUR bond. Traders said that spreads tightened as the new issue was priced at a smaller premium to its CDS than other triple B rated names had priced recently. The contact added that HeidelbergCement seemed to be testing the water for a larger new issue in the near future as it looks to fund the purchase of Hanson. 5Y CDS on Hanson was at 71/76 (flat D/D).

Elsewhere in the sector, shares in Atlantia rose 5% on Wednesday's close after the Italian government said that it had reached a "gentleman's agreement" with the company over a dispute about investment. Atlantia agreed to invest an additional EUR 7bln in the country's highways to end a legal battle with the government. 5Y CDS on Atlantia was 2bp tighter at 25/30. Following Wednesday's large widening, 5Y CDS on BAA was stable at 102.5/107.5.

There was a big mover in the Consumer sector as 5Y CDS on Pernod-Ricard widened 8bp to 73.5/76.5 after it was reported that the company would ask shareholders at its 07-Nov AGM to increase the limit on the amount of capital it could raise from net debt to EUR 5bln from the current limit of EUR 3bln. There was speculation that it was preparing the foundations for a bid for Vin & Spirits, which the Swedish government is expected to sell in a formal sale process to start this month.

Amongst heavy news flow in the Financial sector CDS levels remained relatively unchanged. At a Merrill Lynch arranged conference on Thursday many banks reiterated targets and reassured investors on sub-prime exposures. Societe Generale said that its financial targets for 2007 and 2008 remained unchanged, even though it said that Q3 market conditions were difficult. Senior 5Y CDS on SocGen was unmoved at 22/27 as sub was at 33/38. Italian lender Banca Popolare de Milano said that it still expected net income to fall 10% Y/Y this year, but operating profit to rise 9% Y/Y. Senior 5Y CDS on Banca Popolare de Milano was flat at 30/33 and sub was at 45/49, also unchanged. Among other banks making similar comments were Banca Monte Dei Paschi, in which senior 5Y CDS was 2bp tighter at 30/35 as was sub at 45/50, and BBVA, in which senior 5Y CDS was flat at 33/38 and sub was 2bp tighter at 44/49.

In the Auto sector 5Y CDS on Daimler was 2bp tighter at 28/31 after stating sales at its Mercedes unit rose 7.4% Y/Y to 124,600 vehicles in September. CS



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