The price of protection on Paris-based car parts maker Valeo blew out Thursday after reports suggested the company is looking to acquire U.S. parts group Visteon. While there was no substantiated news of a formal bid and Valeo has not commented, in the past it has said it is looking to make acquisitions and this has given some weight to the reports. The widening comes after significant tightening on the name during August.
Five-year default spreads jumped to almost 80 basis points from 65 bps late Wednesday. One trader noted most activity was at the five-year tenor, but that a steepening curve could trigger trading at seven- and 10-year as players look to pick up yield. "With all these rumors flying around there will no doubt be more buying and selling over the next week," said another London-based trader.
Bond holders concerned about the financial profitability of Valeo led protection buying, traders said, but many noted fast-money accounts such as hedge funds were also active.
In June, Valeo was downgraded to Baa1 from Baa2 by Moody's Investors Service and its credit outlook remains negative. "The downgrade was prompted by the decline in Valeo's group profitability in recent years, with no turnaround likely in the short term," said analysts at Moody's in Frankfurt. Standard & Poor's and Fitch Ratings do not rate the company.
In addition, Visteon is currently restructuring and narrowly avoided bankruptcy last year when it was bailed out by former parent company Ford Motor Co. "There is a view Veleo has nothing to gain in a Visteon takeover," noted a strategist. "It should be about quality, not size."
