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EUR CDS Flow - Norske Skog leads market wider after Q3 warning.
Informa Global Markets - Bondwatch Morning Insight (Europe) (October 19, 2007)

Thursday was a busy news day for the CDS market with plenty of profit warnings, trading updates and a re-emergence of takeover speculation. CDS levels continued to widen as focus was turned back to the paper makers, with Stora Enso and Norske Skog both issuing cautionary profit forecasts.

Traders said that 5Y CDS on Norske Skog traded as high as 360bp, and was 45bp wider at 360/380, following the paper maker's warning that Q3 earnings had been negatively affected by continued price increases on recovered paper and foreign exchange effects. Also wider was 5Y CDS on Stora Enso, by 14bp at 118/128, following the announcement that its Q3 operating results had been negatively impacted by the continuing high price of wood and recycled fibre costs, as well as the weaker USD. These comments followed similar warnings made by UPM-Kymmene last week. 5Y CDS on UPM was 8bp wider at 84/94. A contact said that the widening on Norsk Skog was "overdone" as it seems not to had been affected as badly as its peers and still had a strong operational business. Elsewhere in the Crossover sector 5Y CDS on Thomson was 12.5bp wider at 120/130 after it said that core Q3 revenue fell 2.2% to EUR 1.38bln taking into account the effect of currency movements.

The Consumer sector was busy, with rumours of profit warnings and trading updates catching the eye. Protection on DSG led the way with a 4bp widening in its 5Y CDS, which was at 65/69, after the company said that it was concerned its top line was not growing in line with forecasts and that analysts may cut estimates for the FY by GBP 5-10mln. The company also said that it over-estimated demand for products with Microsoft's new Vista operating system to the tune of 50,000 units. The reaction spread to other names in the sector including Kingfisher, on which 5Y CDS widened by 4bp to 89.5/94.5. Also wider was 5Y CDS on Electrolux which was up as much as 7bp, though it ended 6bp wider at 33/35, amid market murmurings that the company could issue a profit warning. The company responded by saying that it had no plans to issue a statement. There was also a market rumour that Tesco was preparing a bid for Casino, though contacts said that this was unlikely. Shares in Casino jumped 5.2% on Wednesday's close but its 5Y CDS remained unmoved at 19/22 as did 5Y CDS on Tesco at 19/21.

Traders said that in the TMT sector 5Y CDS on EMI was yet again seen widening, following a week where the protection has pushed out over 100bp. An investment bank report said that Terra Firma may issue bonds which are secured by EMI's publishing unit. This would ring fence the assets from the recorded music business, which may issue unsecured bonds covered by existing CDS contracts. On Thursday 5Y CDS was 20bp wider at 335/345 as the report said that CDS on EMI should be trading on a comparative level as other UK LBO targets. Elsewhere in the sector 5Y CDS on Nokia was resisting the weakening tone and was flat at 18/21 on the back of some strong Q3 figures. Shares in Nokia were up 7.5% on Wednesday's close after it reported a Q3 operating profit rise of 69% Y/Y and a 85% Y/Y rise in net profit. CS



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