Tobacco Buzz Stirs Up European Credits

U.K. tobacco company Gallaher Group announced last Wednesday it had received a takeover bid, prompting an uptick in trading of tobacco-related credit-default swaps.

  • 08 Dec 2006
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U.K. tobacco company Gallaher Group announced last Wednesday it had received a takeover bid, prompting an uptick in trading of tobacco-related credit-default swaps. Gallaher spreads pulled in to a midpoint of 18 basis points from 24 bps late last week, while at the same time spreads on Japan Tobacco, tipped as the bidder, widened by one basis point.

Traders noted buying and selling interest on Japan Tobacco and Gallaher respectively was focused on five-year maturities. One credit flow salesman, however, said there seemed to be less knee-jerk buying and selling than that prompted by merger and acquisition reports in other sectors. "This sort of tobacco stuff has been going on for a while," he explained, adding, "And it never seems to happen."

Spreads on Altadis, a Spanish tobacco company, also went two bps wider on the Gallaher effect, hitting a mid of 26.5 bps from 24.5bps. The corporate has been connected with a bid for Gallaher in the past and there was speculation among protection buyers it might be motivated to put in a rival bid. At the same time, explained a trader, Altadis is not viewed as having the financial capacity to make such a bid so there was strong demand for protection on the name.

Going into the holiday season, and the Dec. 20 CDS index contracts roll, there was limited buying interest, said traders. Few players choose to buy protection going into the roll because it will be replaced by more liquid contracts after the roll and spreads on the retiring contracts tend to tighten going into the roll date.

Moody's Investors Service rates Gallaher Group Baa3 and Standard & Poor's has it a notch higher at BBB with a stable outlook.

  • 08 Dec 2006

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