Reports German chemicals company BASF might be considering buying GE Plastics sent speculative accounts scurrying to buy protection. The price of five-year credit protection jumped two basis points over the week, reaching 12 bps Thursday.
A trader in London explained the buying interest was driven by risk takers rather than by bond holders looking for protection. Hedge funds and prop desks were motivated by the cheapness of the credit-default swaps. "When it was at 10 bps, people were like, 'What's the worst that can happen?'" he explained. BASF is rated Aa3 by Moody's Investors Service and AA minus with negative outlook by Standard & Poor's.
Tobias Mock, analyst at Standard & Poor's in Frankfurt, explained the agency has BASF on negative outlook because the chemical company's acquisition spree last year put pressure on its debt. If BASF were to acquire GE Plastics and fund the acquisition through issuing more debt, "Such an acquisition would be negative for the rating," said Mock. Daniel Smith, spokesman for BASF in Ludwigshafen, Germany, declined all comment.
In otherwise quiet trading, GROHE, the German sanitary fittings company, saw its price of protection blow out after tightening at the start of the week. Five-year spreads were at 428 bps Wednesday, after drawing in to 418 bps Tuesday from a one-month high of 432 bps Monday. The high-yield bond's protection price jumped because of growing concern that European Union anti-cartel investigators could issue formal charges this quarter, after a probe of the bathroom-fittings industry.
