The price of protection on U.K. retailer Marks & Spencer saw a substantial swing last Wednesday as the market tried to price the risk of a takeover by entrepreneur Philip Green. Five-year credit default swaps on the name began the week trading at around 260 basis points, but jumped 70bps to 330bps when news of Green's final bid was announced on Wednesday. Spreads narrowed by the end of Wednesday, however, to 260bps again on news that pension fund trustees had refused to meet Green.
"The name is highly sensitive to any news on the takeover bid," said one trader. "The price moves in line with the perceived likelihood of Green winning," he added. Most of the players trading the name were hedge funds and bank prop desks, and bond owners were also buying protection. "There are a lot of outstanding bonds and most of them are in sterling, so the whole sterling community was involved," explained a trader.
"There is more risk priced into the CDS market than the cash market, because of speculation [that] bonds might be bought back," noted Francois Lauras, credit analyst at BNP Paribas in London, explaining why the CDS spread was particularly responsive to news on the takeover bid. Moody's Investors Service rates Marks & Spencer A3 and Standard & Poor's rates the retailer A. Both rating agencies placed the company on review for possible downgrade on May 28. This announcement also sparked a big price jump, up from around 65bps to 280bps in two days.