Credit Markets Update: Telekom bond re-pricing rumours pull in telco spreads

Rumours of heavy over-subscription and a possible re-pricing on Deutsche Telekom’s forthcoming €5 billion bond issue caused five-year credit default swaps on Germany’s main telecommunications company to tighten 10 basis points today to 220bp/230bp. The development had a positive impact on the cost of credit protection for a number of European telcos.

Marketing of the Telekom bond issue has been ongoing for a number of weeks, and issuance is expected imminently following the telco’s Q1 results, published today. The Financial Times today reported the bond is expected to consist of three tranches: a 30-year US dollar debt yielding 370-380bp over Treasuries, and five- and 10-year euro tranches yielding 240bp-250bp and 270bp-280bp over mid-swaps respectively.

Strong demand may result in Telekom tightening the bond issue spreads, for example to 235bp on the five-year euro tranche, said Vladlen Andriouchtchenko, a telecoms analyst at Commerzbank in London. While the credit derivatives market had priced-in expectations of Telekom’s Q1 losses, it was swayed by positive sentiment on the bond issue, said other traders in London.

KPN’s stronger-than-expected QI earnings yesterday, which saw its five-year credit default swaps tighten by 10bp from 218bp/230bp on Monday, also buoyed the telco sector. Five-year protection on France Telecom tightened 10bp yesterday to 350bp/370bp, and spreads on British Telecom came in a few basis points to 85bp/92bp. Credit protection on Telefonica, contracted to 85bp-mid after widening 2bp to 87bp-mid on Monday when it’s A2 credit rating outlook was changed to negative by Moody’s.

Credit protection on Franco-American group Vivendi Universal tightened 30bp this week to 390bp/420bp today. The movement followed reports in French newspaper Liberation on Tuesday that board members are considering splitting the company’s media, telecom and utility sectors. Vivendi’s share price rose 2% on the New York Stock Exchange.

Vivendi’s five-year credit default swaps have widened nearly 185bp from 235bp-mid at the end of April. One high-grade credit analyst in London today said that while the rumours fuel further speculation about the future of Vivendi, it also forces investors to consider the substantial assets the conglomerate holds. “Vivendi has significant disposal potential to cut debt – which is viewed positively,” he said.