The publication of worse-than-expected fourth-quarter results sent protection prices on Danish supermarket chain Royal Ahold higher, in a quiet week for European credit-default swap trading. Ahold jumped 15 basis points wider Wednesday when the numbers--dubbed disappointing by traders--were announced, hitting a mid of 141 bps as DW went to press Thursday.
Reports Ahold might be split up ready for a sale did little to ease pressure on its CDS price, explained traders. In spite of that suggestion, there was general consensus that around 140 bps is a fair price for protection on the group's debt. "I would not recommend buying protection at these levels," said one trader in London, referring to the fact CDS is unlikely to go wider with the agencies sitting tight on their rating of the group. Moody's Investors Service rates it Ba1 with a positive outlook, and Standard & Poor's has it a notch lower at BB, but with a stable outlook.
"It looks relatively fair value for its rating," added another trader. He noted Ahold can be tricky to price comparatively, as it is one of the only European retail names below investment grade and can only be compared to corporates with similar ratings. But, because they operate in different sectors they are affected by different fundamentals.
Although straight protection buying was not favored, one sales trader said he was pitching a curve steepening trade instead. Ahold's curve is flatter than other high-yield names, with 10-year spreads at 195 bps Wednesday, compared to 134 bps for five-year protection on the same day. Buying 10-year and selling five-year CDS has the added benefit of good carry, he noted.
