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Derivatives

LBO Bid Drives VNU Spread Widening

The price of protection on Dutch media and entertainment group VNU blew out more than 20 basis points last week after a consortium of private equity firms launched a bid for the company.

The price of protection on Dutch media and entertainment group VNU blew out more than 20 basis points last week after a consortium of private equity firms launched a bid for the company. News of the bid sent bond holders running to buy up VNU protection, driving five-year credit-default swap spreads to 250 basis points on Monday from around 230 bps the week before. On Thursday as DW went to press, VNU's bid offer had drawn into 235/245 bps.

One trader also noted a high volume of longer-dated protection buying, which pushed seven-year spreads to 268 bps on Wednesday from 251 bps the week before, and 10-year spreads to 289 bps from 271 bps over the same period. "The spread widening was very much news driven," said one trader, who noted dealers had already priced in the likelihood of the VNU accepting the acquisition offer.

Another trader said if the bid was accepted, spreads would likely jump to around 300 bps and be followed by LBOs of other names in the media sector, but if rejected spreads could fall back to around 90 bps. He suggested CDS-market players should sell VNU protection at 235 basis points, to take profit should spreads pull in, and go long protection on other media names to play a potential sector-wide blowout in the event of a VNU takeover.

Standard & Poor's downgraded VNU to BBB minus from BBB on Monday. Anna Overton, analyst in London, said in a report that any takeover scenario will weaken the company's credit quality. "Although it is not certain that the bid...would gain the support of VNU's board and shareholders, we expect shareholder pressure to eventually affect the group's business and capital structure," she noted. Moody's Investors Service rates VNU Baa2.

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