The credit curve began to flatten last week, as traders sensed the end of the recent steepening trend and started selling longer dated protection. The most common strategy was a flattener, buying five-year protection and selling seven-year protection in equal notional sizes.
Clear Channel was the focus of such a trade and in one month, the cost of five-year protection pulled in 35 basis points to 105 bps and 10-year protection drew in 25 bps to 125 bps. The tightening was driven by players entering flatteners because Clear Channel is being taken private via a leveraged buy-out and this usually results in protection spread widening. "This thing is being [bought out] and apparently there is no natural buyer of protection," said a flow trader in the U.S. He added that across the board, regardless of credit quality, people are putting on similar trades.
The fact large shareholders such as Fidelity Investments were expected to put up resistance to the deal was built into ratings guidance issued in November, said James Rizzo, analyst at Fitch Ratings in New York. Fidelity has now publicly announced its opposition and this in large part explains why the name has not widened. Fitch rates Clear Channel at BB minus.
Canadian printing company Quebecor World also tightened from 274 basis points to 222 bps on the back of positive research reports from sector analysts and a broad rally in high-yield names. The name has now reached its tightest levels since October 2005.
"Because people were short, the path of least resistance is that the market will go tighter. People are trying to get long [credit] any way they can find right now," explained a flow trader in the U.S.
