German drugs and chemical group Bayer AG led activity in the European corporate bond market on Monday as it sold a 1.3 billion euro ($1.57 billion) hybrid subordinated bond. In the secondary market, traders said activity was extremely thin, although telecoms operator Cable & Wireless saw its spreads widen as sources familiar with the situation said the company was in early talks to buy privately owned rival Energis.
But with little on the corporate calendar to inspire, few bonds changed hands in the broader market. "I think it's been one of the quietest days of the year so far," said one trader.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 36.5 basis points more than similarly-dated government bonds at 1511 GMT, 0.3 basis point more on the day.
Bayer, the inventor of Aspirin, became the fourth company in the past six weeks to sell ultra-long dated subordinated bonds, which combine features of debt and equity.
They carry benefits for an issuer's balance sheet since the ratings agencies count them partly as equity, while investors get a higher yield than is available on standard senior debt.
The bond was priced at a spread of 180 basis points over swaps with a coupon of 5.0 percent. The bond has a 100-year maturity but is callable after 10 years.
The final spread was at the low end of guidance of 180-185 basis points over swaps - usually a sign of strong demand.
The cost of insuring against a default by Cable & Wireless rose as traders grew concerned that the company could use some of its cash pile - currently available to service debt - for the putative Energis deal, which is tipped to be worth some 700 million pounds ($1.22 billion).
Sources said the negotiations were at an exploratory stage and that it was too early to say whether they were likely to lead to a deal.
But traders pushed five-year default swaps on C&W 20 basis points wider to 180 basis points, meaning it now costs 180,000 euros a year to insure 10 million euros of the company's debt against default.
"Everyone was long. It's a company with pretty poor fundamentals ... but it's got lots of cash," said one bond trader. "Now it's not so much of a no-brainer as it was."
C&W, whose 133-year-old empire once spanned Europe, Hong Kong and the United States, has long been tipped as both a bid target and a predator in the UK, partly because of its cash pile.
Euro-denominated bonds of giant US automakers Ford and General Motors Corp were little changed ahead of the release of second-quarter results on Tuesday and Wednesday, respectively.
"It's extremely quiet," said one trader. "Prices are unchanged to a touch firmer."
Analysts at J.P. Morgan said in a note that they did not expect any major surprises from Ford, after the company revised earnings guidance in mid-June.
"That said, we believe Ford's North American operating performance (an expected loss of $723 million) will further convince the market that there are more similarities than differences between Ford and GM's industrial operations," they wrote in a note to clients.
"We remain of the belief that Ford should not trade more than 50 basis points inside of GM over the long-term."
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