Credit-default swap spreads on British media group Pearson blew out last week after reports Wednesday it was being targeted for a leveraged buyout.
Traders said speculation private equity giant Kohlberg Kravis Roberts had started working on a GBP7 billion bid surprised the market, prompting Pearson's five-year CDS to pop out to 70 basis points Thursday morning from 45 bps Wednesday. Bank prop desks and hedge funds initially raced to take off steepeners or buy protection outright. The five-to-10 curve nearly doubled to 45 bps from 25 bps.
"No one's commenting," said one credit derivatives trader, referring to officials from Pearson and KKR. "But it seems to be much more than a rumor. Spreads will go north of 100 bps very, very quickly with confirmation." Another City trader added, "I'm surprised it hasn't sparked movement in other media companies." He noted CDS for media company ITV, for example, was unchanged at about 73 bps.
Five-year spreads had pulled in to about 62 bps and 10-year spreads to 107 bps as DW went to press late Thursday. Traders said the "relief rally" was driven by profit taking from banks, which had been short media sector names before the reports and by scepticism of the news creeping in.
"Some breakup is quite likely," said Rob Orman, senior strategist in credit research at The Royal Bank Of Scotland in London. "I feel strongly that something will happen in the next year to 18 months, but I don't think we're there yet."
Moody's Investors Service maintained its Baa1 rating and stable outlook and Standard & Poor's held its BBB+ rating and stable outlook.
