Protection Prices For Safeway Boomerang

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Protection Prices For Safeway Boomerang

Credit-default swap spreads on Safeway, a U.K. grocer, whip-sawed last week, widening and tightening by as much as 100 basis points at a time, as investors and dealers reacted to news reports about bids for the supermarket being referred to the Competition Commission. "People are pretty much trading on headlines," said one trader. On Wednesday after the Department of Trade and Industry referred Wm Morrison Supermarkets, Tesco, J. Sainsbury and Wal-Mart to the Competition Commission, five-year mid-market spreads widened to about 300 basis points from the low 200bps. On Thursday, investors sold protection after Wal-Mart stated it was still interested in pursuing its bid for Safeway. Spreads tightened to 200bps/220bps by early afternoon.

Traders said credit spreads on Wal-Mart trade extremely tight, between 22-25bps. If Wal-Mart were to purchase Safeway, it would improve the credit rating of Safeway, leading to spread tightening, according to a credit analyst in London. Wal-Mart is rated AA and Safeway is rated BBB plus by Standard & Poor's.

Volume in the name was spotty, with trading centered around breaking news. One trader said he wrote four tickets on Wednesday of about USD5 million each, but on some days sees no activity.

The key issue to bond market investors is whether Philip Green, a retail entrepreneur, who is the only bidder not being referred to the Competition Commission, is successful in buying Safeway, said the analyst. She noted that if he were to purchase the U.K. supermarket chain, the deal would be likely financed through a leveraged buyout, which would be bad for bondholders. A purchase by Wal-Mart, however, would be the best case scenario for bondholders because of the company's strong credit rating, she said.

Five-Year Credit Protction On Safeway

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