Qantas Buyout Raises Dealer CDS Hopes
A spike in credit-default swap trading volumes on the back of the buyout of Aussie airline Qantas Airways has some credit traders hoping the region could see a rapid increase in CDS flows.
A spike in credit-default swap trading volumes on the back of the buyout of Aussie airline Qantas Airways has some credit traders hoping the region could see a rapid increase in CDS flows. Headline grabbing buyout attempts, including Coles Group last summer and Qantas last month, have resulted in an increase in CDS trading volumes on the respective single names and a general pickup in trading across other Aussie credits.
A good deal of the uptake is being spurred by European and U.S. hedge funds looking to take positions on the outcome of the buyout bids. Dealers say this is a novel development because these players drive CDS trading in the U.S. and Europe, but have previously not shown much interest in Asia Pacific. Lack of hedge fund interest, along with a limited universe of Asian debt, accounts for the region's CDS volumes lagging behind Europe and the U.S. "Once [hedge] funds have taken opportunities in Europe and the U.S. they have to go looking elsewhere," noted one Australian trader.
Mergers and acquisitions activity in Australia will not necessarily have a direct knock-on effect on other Asian markets, cautioned one trading head, but the uptick in hedge fund interest is promising for a region where CDS volumes have been stagnant compared with record growth in Europe and the U.S.
Spreads on Qantas have widened to as high as 230 basis points from around 30 bps at the beginning of December, but toward the end of last week settled at around 200 bps. Airline Partners Australia, a consortium led by Macquarie Bank, has made an offer of AUD11.1 billion (USD8.6 billion) for the airline which closes March 9. Further takeovers are also expected and Australian traders are expecting the high volumes to continue for at least the short term. For the mid-term--beyond the first half of 2007--traders are less certain and expect a moderation of levels, because there are not enough names in Australia to sustain the buyout spree.
Moody's Investors Service gives Qantas a Baa1 rating, though since the takeover bid was accepted by the company in December its rating is under review for downgrade. Officials at Qantas and Coles could not be reached for comment.