Spreads on the credit-default swap of Corus, the Anglo-Dutch steelmaker tightened last week after a report Tuesday suggested Tata Steel, which is acquiring the company, will buy back existing debt as part of the deal. The £6.7 billion ($13.13 billion) financing scheme would eliminate deliverable obligations, leaving CDS contracts orphaned, or worthless.
Five-year protection tightened to 147 basis points Thursday from 175 bps the week before as hedge funds and other players sold protection. "There's more and more conviction the bonds will be taken out and there will be no deliverables," said one Citi trader. "Obviously when there's more conviction, CDS will tighten. All the guys who had bought protection before were selling protection last week."
Traders said Tata's plan to buy out current shareholders and bondholders with new equity and bonds was broadly expected, but CDS holders were hoping the new debt would be linked to existing CDS contracts. They added the market is still waiting for confirmation and CDS will be volatile until succession issues are resolved.
Standard & Poor's maintained its BB rating and kept the company on CreditWatch with developing implications. Moody's Investors Service maintained its Ba2 rating with direction uncertain. Both agencies put Corus on watch in October, when the company's board first considered Tata's offer. Alex Herbert, analyst at S&P in London, said the outlook is a result of ongoing uncertainty about the combined entity's long-term financial structure and integration plans and that future outlook depends on resolution of that next month.