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Derivatives

Buyout Talk Sends Rentokil Wider

Rentokil Initial, a U.K.-based hygiene and security company, was the center of credit-default swap buying last week, as traders positioned for spread widening in response to talk of a leveraged buyout.

5year.gifRentokil Initial, a U.K.-based hygiene and security company, was the center of credit-default swap buying last week, as traders positioned for spread widening in response to talk of a leveraged buyout. Raphoe Management, the investment vehicle of Sir Gerry Robinson, a former chairman of several U.K. PLCs, was reported in last Sunday's U.K. papers to be interested in preparing an offer for the corporate and the price of credit protection on the name shot up as a result. Five-year CDS was trading at around 95 basis points at the end of last week, compared to 70 bps at the end of the precious week.

Traders said most hedge funds had been short the name for several weeks, in anticipation it might be a likely target for a buyout. Funds were short at 70 bps and there was some profit taking when the spread hit 100 bps mid-week, said a trader at a German firm. There was two-way flow throughout the week, he added, and even following an announcement last Friday Raphoe Management was not ready to put in a bid, there were still players positioning for an event within the next few weeks.

Gavan Nolan, analyst with Markit Partners in St. Albans, Hertfordshire, said the cash piles private equity firms are sitting on are driving a lot of leverage buyout reports and Rentokil has been caught up in the rumor mill. Rentokil spreads could well pull in over the next week or so if a bid fails to materialize, he added.

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