KPN Leads Declines in Credit Risk on Telefonica Deal

KPN NV led declines in European bond risk after Telefonica SA agreed to buy the company’s E-Plus German wireless unit in a $10.7 billion cash-and-stock deal.

Credit-default swaps insuring KPN’s debt fell as much as 22 basis points to 135 basis points, the lowest level since Sept. 21. The Markit iTraxx Europe index of contracts on 125 companies with investment-grade ratings fell for a fifth day, dropping 0.9 basis point to a near two-month low of 96 basis points at 1:02 p.m. in London.

KPN will get 5 billion euros ($6.6 billion) and a 17.6 percent stake in the deal combining E-Plus and Telefonica Deutschland Holding AG, the Spanish carrier’s German unit, KPN said today. The cash payment would shrink the company’s debt from 2.2 times earnings to below 1.5 times, according to Ward Snijders, a spokesman for KPN in the Hague.

“From a balance sheet perspective, today is extremely positive for KPN,” said Sam Morton, an analyst at Mizuho International Plc in London. The deal will give KPN “a huge amount of financial flexibility should they decide to sell it.”

European credit markets have rallied since Federal Reserve Chairman Ben S. Bernanke said July 17 there was no set path for the withdrawal of stimulus measures. The average yield on euro-denominated investment-grade bonds is holding at 2.07 percent after falling from an eight-month high of 2.38 percent reached June 24, according to Bank of America Merrill Lynch index data.

“People are realizing that it’s not the end of the world,” said Juan Esteban Valencia, a strategist at Societe Generale SA in Paris. “The impact is fading so the market is slowly going back to where it was before.”

New Bonds

In the new issue market, Uniqa Insurance Group AG is selling 350 million euros of 30-year notes that can be called back by the company after 10 years, according to a person familiar with the matter. The bonds will be priced to yield 6.875 percent until July 2023 and will pay a floating rate thereafter. Turkan Koksal, a spokeswoman for the company in Vienna, declined to comment on the sale.

UniCredit Bank Austria AG, the Vienna-based unit of Italy’s biggest bank, sold 500 million euros of five-year covered bonds that were priced to yield 26 basis points more than the mid-swap rate, according a person with knowledge of that deal.

Louis Dreyfus Commodities BV, the world’s largest raw cotton trader, is planning to issue at least 300 million euros of high-yield bonds, according to another person. The five-year notes may yield about 4 percent.

(Corrects story from July 23 to change currency in third paragraph.)
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