The price of protection on U.K. drinks company Allied Domecq jumped last week, following news it is in talks with rival Pernod Ricard about a possible takeover by Pernod. The price of credit-default swaps on the name stepped up to 105 basis points last Thursday, from 45bps at the start of the week.
Traders said the price rise was driven by a selloff in the cash market. Banks building up a long cash position as a result were then buying CDS to hedge the bonds. Initial reaction to the news saw a dramatic jump in the CDS price on Monday and Tuesday from 45bps to 75bps. Trading fell off on Wednesday but rumors circulating in the market of interest in Allied from private equity firms triggered more buying on Thursday and pushed the CDS price out a further 15bps to 105bps. "It can still go further," said one trader. He noted details of the structure of Pernod's bid would likely be the next trigger for a further jump in Allied's CDS price.
Moody's Investors Service rates Allied Domecq at Baa1, and Standard & Poor's rates it BBB plus, with negative outlook. Fitch Ratings has the drinks group one notch lower at BBB with positive outlook. Frederic Gits, analyst at Fitch in Paris, explained Pernod's acquisition will likely be financed by debt and this will put pressure on the credit rating of Allied's bonds. He noted the extent of any downgrade is difficult to predict without details of Pernod's acquisition plans.