Credit Risk Falls Before U.S. Election as VW Sells Convertibles
Credit risk fell to a two-week low in Europe before the U.S. presidential election, helping Volkswagen AG (VOW) sell 2.5 billion euros ($3.2 billion) of bonds that automatically convert to shares at maturity.
The Markit iTraxx Europe index of credit-default swaps linked to 125 investment-grade companies declined three basis points to 127 at 12 p.m. in London, according to prices compiled by Bloomberg. VW priced its three-year notes to pay an annual coupon of 5.5 percent, with a minimum conversion price of 154.50 euros and a maximum of 185.40 euros.
U.S. voters decide today between giving President Barack Obama another four years in office and replacing him with Republican challenger Mitt Romney. VW, which this year paid 4.49 billion euros for the 50.1 percent of sports-car maker Porsche that it didn’t already own as well as 860 million euros for Ducati motorbikes, said it needed the money from the convertible bond sale to strengthen funding.
“We believe that this transaction is a rather credit- positive surprise and will safeguard VW’s current ratings,” Sven Kreitmair, co-head of corporate credit research at UniCredit SpA in Munich, wrote in a note to investors.
VW’s preferred shares dropped as much as 4.7 percent to 154.75 euros. VW is rated A3 by Moody’s Investors Service, four levels above junk, and an equivalent A- by Standard & Poor’s. Both firms have a positive outlook on the company’s debt.
Snam SpA (SRG), the operator of Italy’s nautral gas distribution network, was also in the new-issue bond market, according to a person with knowledge of the transaction, who asked not to be named because they’re not authorized to speak about it. The Milan-based company offered a 1.5 billion-euro bond split between three- and seven-year tranches.
German software company SAP AG (SAP) is raising 1.3 billion euros, also over three and seven years, in a deal managed by Deutsche Bank AG, Societe Generale SA and UBS AG. Mapfre SA (MAP), Spain’s biggest insurer, offered three-year benchmark bonds in euros that will be priced to yield about 5.375 percent, a person with knowledge of the financing said.
In credit-derivative markets, the Markit iTraxx Crossover index of default swaps linked to 50 mostly junk-rated European companies fell nine basis points to 510, the lowest since Oct. 22, according to prices compiled by Bloomberg.
The Markit iTraxx Financial Index of swaps linked to the senior debt of 25 banks and insurers declined four basis points to a two-week low of 170.
A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
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