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Derivatives

Olivetti Spreads Tighten After Takeover

Credit default swap spreads on Olivetti tightened 30 basis points to 130bps last week as traders absorbed the news that its debt was going to be paid down. The debt pay down will come as a result of Pirelli and Edizione Holding acquiring a 23% stake in Olivetti for EUR7 billion (USD6.2 billion). Traders said credit default swap spreads tightened to Thursday from 160bps a week before. Telecom Italia, a sister company, also tightened but by only 10bps to 95bps/105bps.

A popular trade was to sell credit default swaps on Olivetti at spreads around 130bps and buy Telecom Italia at spreads around 100bps, according to Fedele Cova, head of credit default swaps trading at IntesaBCI in Milan. He explained the position holds some basis risk but the two companies are expected to have a high correlation and the trader picks up 30bps.

Filippo Lanza, credit derivatives trader at Lehman Brothers in London, said even though the summer season means trading volumes are down there is still liquidity in Olivetti credit default swaps because it has a large amount of debt, most of which is in publicly tradable bonds. But it also has convertible bonds outstanding, which means convertible arbitrage hedge funds provide another source of demand for protection. Lanza estimated that approximately EUR100 million (notional) of credit protection was traded on Olivetti last week because players were structuring subordination trades, where they were betting on the relative value of Olivetti versus Telecom Italia.

Standard & Poor's rates Olivetti triple B and Telecom Italia triple BBB plus and Moodys' Investors Service rates them Baa2 and Baa1, respectively.

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