Two-year protection on France Telecom widened 30 basis points to 120bps last week after the telecom company launched a convertible bond offering. Five-year protection widened from 120bps before the convertible was offered to 140bps on Thursday. Some hedgers opted to use the five-year maturity because it is more liquid than the two-year. Louis Landeman, European telecom analyst at Standard & Poor's in Stockholm, said France Telecom may use some of the proceeds from the convertible to finance its acquisition of Orange from Vodafone Group. If the company does so, France Telecom's leverage will increase, leading to a potential downgrade from its current A rating. If instead it raises the funds it needs for the acquisition via an initial public offering for Orange, it will use the proceeds of the convertible to refinance existing debt, which will not increase its total debt burden.
A spokeswomen at France Telecom said the two-year convertible is for approximately EUR3 billion (USD2.8 billion) and is convertible into Orange shares. The deal had not yet priced as DW went to press on Thursday. Moody's Investors Service rates the company A1.
Separately five-year protection prices on Ford Motor Credit and General Motors Acceptance Corp. last week increased 10-15bps after Standard & Poor's put their single-A credit ratings on negative outlook because of concerns about the extent to which both units will continue to be profitable amid increased competition in the North American market. Moody's has left the A2 ratings on the finance arms of the two automobile companies unchanged. Traders said spreads on the auto sector as a whole moved out 10-15bps in sympathy. Demand for protection came primarily from bond holders and banks' proprietary trading desks.
