Five-year credit protection prices on BHP have fallen about five basis points to 43 basis points since the announcement last month of a merger between Australia's BHP and the U.K.'s Billiton. Graham Jarvis, credit derivatives trader at Westpac Banking Corp., said there should be additional activity in the name once shareholders approve the merger in the upcoming weeks. Four trades were said to be executed on the back of the news, in the ballpark of 43bps for five year protection. BHP spreads remained at 40bps/45bps at press time for five-year protection.
BHP is the biggest name in the local credit derivatives mart: "It's the most liquid name by far," said Jim Fingleton, associate director of fixed income, at SG Australia. He added that on typical days, bid/offer quotations could be seen on one, three, four, and five-year maturities: "It's the one credit quoted across the curve," he added.
Traders are expecting a credit upgrade on the A-/A3 rated company pending approval to the merger. A trader in Sydney said that an upgrade of one or two notches is likely. Fingleton noted that there are synergies to the merger and should benefit both firm's shareholders.
Some believe that prices for credit protection on BHP should be cheaper than they are. Pierre Katerdjian global credit swap trader at Deutsche Bank in Sydney, believes that the fair value of BHP is in the 30bps range. "The combined group is expected to be stronger than BHP, which had been trading in the mid-to-high 40bps-range before the announcement. Given the liquidity of the name in the global credit derivative swap market, there should be further tightening of the credits' default premium."
