The price of protection on Portugal Telecom jumped nearly 200% last week after a hostile bid from smaller Portuguese telecom firm Sonae. Spreads on five-year credit-default swaps pulled in again toward the end of last week, after an initial jump to 160 basis points Tuesday from 45 bps Monday.
PT's protection price settled down as prop desks and hedge funds--the key buyers Tuesday--took time out to assess the likelihood of Sonae's bid going through. Buyers had rushed in, spurred on by lack of market knowledge about Sonae and speculation the bid would be highly leveraged. Reports emerged Wednesday the smaller firm may just buy the Brazilian arm of PT and CDS buyers were trying to figure out what this would mean for PT's debt before putting on a position. Traders reported some prop desks, however, started to sell protection again later in the week, taking the view the price had been pushed too high.
PT bonds outperformed CDS, which traders said indicated some bond-fund managers may also have been involved, buying protection to hedge a long PT position. Other telecom names, including Telefonica and France Telecom, also widened slightly on the news.
Fitch Ratings has Portugal Telecom at A minus with a stable outlook. Moody's Investors Service and Standard & Poor's both rate it similarly, but put the name on watch for possible downgrade in the wake of the Sonae bid. Analysts said it is difficult to comment on the deal until full details emerge. If Sonae bids for the entirety of PT, it will likely result in a combined group with increased leverage.
