The price of credit protection on German chemical maker Degussa blew out more than 100 basis points last week on reports its majority stakeholder is considering selling off assets to a private equity firm. German magazine WirtschaftsWoche said mining group RAG, which holds 50.1% of Degussa's equity, is in talks with The Blackstone Group about buying assets to finance a complete takeover from 43% stakeholder E.ON, a German power company.
Investors converged on buying Degussa protection, driving five-year credit-default swap spreads to 170 basis points on Wednesday from 70 bps the week before, traders reported. "All the activity has been on the back of the leveraged buyout rumors," said one trader at a U.S. house in London, adding the majority of trades were entered into by players hedging exposure to Degussa bonds.
One analyst said the Degussa blowout was exacerbated by complications surrounding the proposed EUR540 million sale of its food ingredients business to U.S. food company Cargill. On Wednesday, the European Commission opened an investigation into possible competition issues because the two companies are among four leading suppliers of lecithin, a natural emulsifier used to make a wide range of foods. U.S. antitrust authorities cleared the sale in November.
Degussa is rated Baa1 by Moody's Investors Service and BBB plus by Standard & Poor's, which also has the name on a negative watch.
