Five-year credit protection on Dutch telecom company Royal KPN narrowed 100 basis points last week to 250bps/260bps as the market waited on news about the KPN-Belagcom merger. London-based traders said volumes were between two and three times the average for this time of year, with approximately EUR40 million (USD36.4 million) notional trading everyday. Banks and investors taking profits before the merger announcements were behind the selling. The typical size of the trades was EUR5-10 million.
Mattias Soderberg, telecom analyst in the credit research group atJ.P. Morgan in London, said it is recommending clients increase exposure to KPN by selling credit default swaps or buying the euro-denominated '06 bond. The spread between five-year protection on Deutsche Telekom and KPN was approximately 160bps last Thursday and Soderberg predicts this could narrow to 100bps. Investors will earn a higher yield if they opt to sell credit protection on KPN but will be compensated with a step-up of 37.5bps, per agency, if it is downgraded below mid triple-B and there is also a put at par if there is an unfavorable restructuring of the company.
KPN spreads narrowed last week because the telecom company said it would make a decision about the planned merger with Belagom this week, according to Soderberg. He estimates there is a 60-70% chance the two companies will agree to a merger because they have agreed on the politics but there is still a dispute over the value of the companies. KPN's debt means its equity is worth less than Belagcom's but the size of the company means the firm's value is higher. He added, "price is an important issue but its easier to agree on than politics."
Moody's Investors Service rates KPN Baa2 and Standard & Poor's rates it BBB-plus.
