Hedge funds long protection/short the underlying bonds on the U.K.-based airports operator BAA were quick to reverse positions this week on news the company had accepted a takeover bid. The GBP10 billion (USD18.5 billion) bid came from Airport Development and Investment, a consortium led by Spanish infrastructure group Grupo Ferrovial.
The protection off-load come on the back of fears the company's debt would be retired, leaving protection holders with no succeeding deliverables. This problem, termed orphaning CDS, is a pressing one for market participants after protection buyers of corporates including Rentokil and J Sainsbury were caught short (DW, 5/5) earlier this year.
Five-year BAA credit-default swap spreads tightened to 40 basis points Wednesday, from 56 bps the week prior. On Thursday, spreads had widened to 47 bps on the back of news a more highly leveraged bid for the company, led by Goldman Sachs, had been quashed. Traders said this coincided with the market coming to the conclusion ADI will only retire BAA's sterling bonds, leaving euro bonds as deliverable under CDS.
BAA spreads, however, could tighten again if this view proves incorrect or unexpected refinancing decisions are announced, said traders. "We are all waiting to see what assets will be disposed of, what assets will be securitized and which exact bonds will be bought back," said one.
"The risk of a more aggressive overall corporate financial structure post the takeover has greatly increased," said Jan Willem Plantagie, credit analyst at Standard & Poor's in Frankfurt, in a report Tuesday. S&P downgraded BAA's long-term credit rating to BBB plus from A, while Moody's Investors Service downgraded its issuer rating to Ba1 from Baa3.
