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Derivatives

Protection Prices On U.K. Grocer Jump After Takeover Rumors

The price of credit-default protection on U.K. supermarket chain J Sainsbury jumped 12 basis points Thursday to 81bps following press speculation that U.S. retailer Target Corp. was preparing an offer.

The price of credit-default protection on U.K. supermarket chain J Sainsbury jumped 12 basis points Thursday to 81bps following press speculation that U.S. retailer Target Corp. was preparing an offer. Moody's Investors Service downgraded Sainsbury's Tuesday to Baa2 with a negative outlook from Baa1, although traders said this had no effect on the CDS price because it had already been priced into the spread. Sainsbury's credit-default swap spread has been rising since the rumors of a possible takeover bid in April by Kohlberg Kravis Roberts, a U.S. venture capital firm, saw the price rise to around 58bps from around 49bps in one week (DW, 4/11).

Traders said a combination of hedge funds and prop desks were speculating on the name and the price was pushed higher by the heavier weight of protection buyers compared with sellers. Rumors that Philip Green, a U.K. retail entrepreneur, was also interested in Sainsbury's were denied by Green in a Reuters article, but also fuelled the CDS spread widening. One trader suggested the price of protection on Sainsbury's would likely continue to rise. "There's always a question mark around what the family will do," he noted. The Sainsbury family owns a 34.4% stake in the company.

Standard & Poor's rates the supermarket BBB plus. Andrew Canwell, senior analyst at Moody's in London, noted in the rating downgrade statement that Sainsbury's would continue to face pressure on its operating cash-flow generation and that the market share erosion the chain has suffered in the last year has yet to reverse. Canwell declined additional comment.

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