Credit default swap spreads on five-year protection on Tyco International widened by 5-10 basis points last week to 125bps on Tuesday after Tyco announced it had agreed to acquire CIT Group Inc., a financial-services concern based in New York, for USD9.2 billion. The equity markets reacted negatively to the news, pushing the company's share price down 8%, while the credit markets sent the price of protection up to match its five-month high. A credit default swaps trader in New York said that many analysts were not sure how well Tyco, a manufacturing and service company based in Exeter, N.H., would be able to manage a company that has a completely different profile. "There's a certain degree of market skepticism about their ability to integrate the acquisition," he said. He added that the price of protection on Tyco should return to the 105-110bps range in the next week, however, as the rest of the market calms down from last week's turmoil.
Nick Hungerford, managing director, equity and credit derivatives at Bank of Nova Scotia in Toronto, noted that the name traded slightly above 125bps on Tuesday, then narrowed to 125bps as the market digested the news of the acquisition. "As the day progressed, people began to think that [Tyco's acquiring CIT] wasn't such a bad deal after all," said Hungerford. He also said that one of the reasons for the eventual narrowing of the spread is that by acquiring CIT, Tyco will now be able to provide financing for clients' purchases, because CIT has experience in the loan markets. In addition, Tyco paid for the majority of its acquisition in stock, rather than cash, and the price for CIT was seen as reasonable.
In mid-January and early February, protection on Tyco traded in the region of 95bps. The credit default swaps trader in New York said that decline was a reaction to the Federal Reserve Board easing interest rates.
