French utility Suez's bid to buy out minority shareholders in Belgian subsidiary Electrabel took centre stage in the corporate bond market on Tuesday, with the majority cash-financed offer putting spreads under pressure.
Suez offered 322 euros in cash and four of its shares for each Electrabel share in a deal worth 11.2 billion euros, and said it hoped to retain its A category credit rating.
The company said it had approved an equity capital increase of about 2.5 billion euros within 12 months and debt financing would account for only 56 percent of the bid total, providing some reassurance to the credit market.
"If the rights issue goes through and they do the disposals, they could retain the (A category credit) rating," said one credit analyst who declined to be named.
"But it depends how convincing they are with the ratings agencies. And what is left to sell at Suez is a good question too."
Suez is rated A2 with a negative outlook by Moody's Investors Service and A- with a stable outlook by Standard & Poor's.
Traders quoted five-year default swaps on the company 3 basis points wider on the day at 31 basis points by 1310 GMT, having earlier hit wides around 33 basis points.
Suez's 5.75 percent euro bond due 2023 was bid at 134 basis points over Bunds, some 5 basis points wider on the day, traders said.
The bid is a further sign that company executives are now willing to put the cash piles built up during a period of balance sheet repair to work.
It follows hot on the heels of a 6.4 billion euro take-over by France Telecom and a hefty hostile bid by French glassmaker Saint-Gobain for Britain's BPB Plc.
Bonds of US automakers recouped some of the losses they registered on Friday and Monday, a trader in London said.
The sector was hit hard after US auto parts maker Delphi Corp said it might have to file for bankruptcy if it could not cut high wage and benefit costs.
"The market is following the Delphi situation and is now thinking they will not file for Chapter 11," said the trader.
Elsewhere, early weakness in the high-yield market faded. After trading as much as 7 basis points wider earlier in the day, the iTraxx Crossover index, used as a barometer of sentiment in the high-yield market, tightened to trade at 295 basis points, one index trader said.
Traders had bought protection as oil prices hit record highs above $64 a barrel and following news that Iran had resumed work at a uranium conversion plant, fanning Western fears it may be seeking nuclear weapons, the trader said.
But positions had then been cut after equities and government bonds failed to react, he said.
British cable company NTL lagged as it narrowed its operating loss for the second quarter but said revenues declined and it may miss its full-year subscriber target.
The company said that competition had intensified and it had lost some business division contracts.
Five-year credit default swaps on NTL were some 5 basis points wider at 372.5 basis points, a trader said.
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