The price of protection on U.K communications provider Colt Telecom drew in more than 150 basis points Thursday morning after the company announced it will issue GPB300 million (USD525 million) in shares to pay down outstanding debt and cancel its U.S. listing. Bond issues mature in 2007, 2008 and 2009, and the shares will be used to redeem some of these notes, after which net debt will be reduced to less than GBP100 million (USD175 million).
Traders said high-yield players, in particular proprietary desks and hedge funds, were quick to sell protection on the name, driving in five-year credit-default swap spreads to roughly 250 bps Thursday from around 410 bps Wednesday. "People who own the bonds are selling, which is putting pressure on the front end of the curve," said one trader, who also noted activity at three years. Colt Telecom's bid/offer spread was hovering around 10-20 basis points, traders said.
A telecoms researcher at a European bank said the plan was a positive surprise, as Colt had been expected to announce the launch of another high-yield bond to repay the outstanding issues. "It's great for bond holders because instead of the company being three times leveraged it will be less than one times leveraged," he said.
"Colt CDS has been trading for a very long time so there are a lot of people with positions to cover," said one trading official explaining the price pull-in. He predicted spreads would continue to grind tighter, but this will happen as more details of Colt's bond buy-back become known. Colt is rated B minus by Standard & Poor's and B3 by Moody's Investors Service.
