Credit-default spreads on Finnish telecom company Sonera tightened by roughly 50 basis points last week following its announcement of plans for a EUR5.75 billion (USD5 billion) merger with Sweden's Telia, marking Europe's first cross-border merger of national telecom companies. Mid-market five-year protection on Sonera was 75bps Wednesday, down from roughly 130bps earlier in the week before news of the merger. Telia's five-year spreads were about 5bps wider at 65bps.
Traders said the new entity is expected to be single A rated, compared to Sonera's current BBB rating. "Telia is a stable company with a lot less debt, it's just a much better company," said one trader in London. Telia has a AA rating from Standard & Poor's and a A1 rating from Moody's Investors Service. "Sometimes you get two [weak companies] coming together and they both widen out, but in this case one is largely absorbing the other," noted one trader.
Neil McLeish, head of European credit strategy at Morgan Stanley in London, said, "Sonera is a lower rated credit and the spread tightening reflects a positive impact for Sonera bondholders as a result of the proposed transaction."
Analysts agreed that the merger is a positive credit event for Sonera and that there will be synergies with Telia. However, they also noted the deal is subject to certain intangibles such as regulatory approval by the European Union, causing the current disparity in spreads.
