A quiet week for credit-default swap trading was dotted with some small moves triggered by leveraged buyout talk.
The price of protection on Harrah's Entertainment, for example, tightened about 25 basis points to 235 bps on Thursday morning on rumors the gaming company will turn down a takeover offer from a private equity consortium. "There was some profit taking in here as Harrah's bonds underperformed the CDS," noted one trader. Moody's Investors Service moved Harrah's to watch negative at the start of the month and is still expected to downgrade the corporate by the end of the month, which led to a sell off from investment grade bond holders.
"There is a lot of posturing about what the bidding price is going to be, the bid has already gone up once and management would like to get a better price," explained Michael Paladino, an analyst at Fitch Ratings. Fitch downgraded the company's debt from BB plus to BBB minus on October 3 and signaled that if additional debt was added to the finance package to win the bidding, further downgrades could follow.
Separately, Starwood Hotels & Resorts Worldwide's credit-default swap protection price continued to rise on speculation it is a leveraged buyout target. Spreads started widening last month on rumors that private equity groups were looking at the hotel operator. Spreads widened an average of 15 bps last week, and about 30 bps since the start of this month. The credit is also one of six new names added to the investment grade CDX, which also added to some of the selling interest from CDX-linked collateralized debt obligations, traders noted.
