Credit-default swap protection on Rentokil 1927, one of the two entities comprising U.K services company Rentokil Initial 1927, swooped by more than 30 basis points last week. The drop to 27 basis points on Wednesday from 60 bps the previous Friday was triggered by a change in the debt guarantees between the two entities which sent players rushing to sell protection.
On Tuesday, Rentokil Initial issued GBP300 million (USD522 million) in 10-year bonds, to add to debt which had previously been issued under Rentokil 1927 and which mature in 2008. The cross debt guarantee between the two entities is capped to the maturity of the 1927 bonds, snipping the value of five-year CDS on the vintage bonds by two years. "The fact that these trades now don't have any value past two years started the selling spree," said one London-based trader.
After the new bond issue was first mooted, some players were quicker on the up take than others, said traders: a number of hedge funds sold when spreads were still hovering around 60bps. The rest of the market, however, lagged. "Usually the market is a bit more aware of things like this and has legal departments looking at it," said one surprised trader.
An analyst at Standard & Poor's, which rates both Rentokil entities BBB, said the company underwent a corporate reorganization last summer which divided up the company into two entities for technical purposes. "What we see now is debt is going to flow up to the Rentokil Initial when it was previously attached to 1927," said another official.