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CDS Report - BAA jumps wider on S&P downgrade to junk status
Informa Global Markets - Bondwatch Morning Insight (Europe) (November 23, 2007)

As can be expected on Thanksgiving Thursday the CDS market was subdued, a welcome relief after the widening in spreads seen on Wednesday. Some traders were kept busy by large moves in 5Y CDS on BAA and Kelda. Apart from this spreads were broadly unchanged, but a trader did say that the lower beta names were moving wider. A contact said that many investors "had taken their chips off the table" heading in to the Thanksgiving weekend, causing the sell-off in equities and bonds on Wednesday.

The Industrial sector provided the largest mover of the day as 5Y CDS on BAA moved 40bp wider to 235/245 after S&P late on Wednesday downgraded the company a full five notches into junk status (BB-) with ratings remaining on CreditWatch negative. This was based on the uncertainty surrounding the refinancing of BAA's debt in the current credit market conditions. S&P highlighted that BAA had a very aggressive financial profile, characterised by high leverage and low interest coverage ratios. 5Y CDS on Finmeccanica was flat at 56/58 after it announced that it was proposing a share buy back of as much as 8% of the company's stock.

The other big move came in the Energy sector from Kelda on the back of a bid approach. 5Y CDS on Kelda initially moved 14bp wider, having earlier traded down at 44, after rumours that there could be stake building from the Middle East. Later Kelda announced that it had received a bid approach from a consortium offering GBP 110.1 a share in cash. 5Y CDS on Kelda ended 25bp wider at 64/69.

Elsewhere in the sector Imperial Energy said that an initial takeover proposal from Gazprom would not be progressed and that discussions had concluded. 5Y CDS on Gazprom was at 197/202 (+7bp D/D). There were few trading updates apart from in the Consumer sector from Air France and Morrison. 5Y CDS on Air France was unchanged at 79.5/84.5 after it reported that Q2 operating profit rose 27.6% Y/Y, and 5Y CDS on Morrison was also flat at 87.5/92.5 after it reported that like-for-like sales in the 14 weeks to 04-Nov were up 3.7% Y/Y. Shares in Morrison rose as much as 8% on Wednesday's close. Elsewhere in the sector shares in Henkel fell 2.5% on rumours of a capital increase, though its 5Y CDS was flat at 40/42.



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