Bloomberg News

Bord Gais Bonds Lead Gains in Europe as Credit Risk Unchanged

November 21, 2012

Bord Gais Eireann’s bonds led gains in Europe, surging to a two-year high after the Irish utility offered to buy back its securities and issue longer-dated debt. Credit risk was little changed.

Bord Gais’s 550 million euros ($704 million) of 5.75 percent bonds due 2014 jumped 1.5 cents on the euro to 106.5 cents, sending the yield to a record-low 1.53 percent, data compiled by Bloomberg show. The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies rose one basis point to 129 at 12:30 p.m. in London.

Cork, Ireland-based Bord Gais is selling bonds as company borrowing costs hold near the lowest levels in more than a year and investors shrug off a deepening crisis in the Middle East and France’s loss of its top credit rating. The state-owned utility’s proposed offering follows last week’s sale of seven- year bonds by Dublin-based Electricity Supply Board.

“Bord Gais is hoping to tap into some of the same investor demand seen last week when the Electricity Supply Board issued an earlier bond,” Ryan McGrath, an analyst at Dolmen Securities in Dublin, wrote in a note today.

Investors demand an extra 106 basis points of yield relative to swaps to buy corporate bonds after reaching 102 on Nov. 7, the narrowest gap since July last year, according to Bank of America Merrill Lynch’s EMU Corporates, Non-Financial Index.

Premium Plunge

The yield premium on Bord Gais’s 2014 bonds plunged 85 basis points to 100 basis points, the biggest spread tightening in Bank of America Merrill Lynch’s index. The utility’s tender will be funded with a sale of notes due December 2017 yielding about 275 basis points more than swaps, according to people familiar with the deal.

Investors reduced wagers against French government and bank debt after the downgrade by Moody’s Investors Service, with credit-default swaps on the sovereign falling three basis points to 89 and contracts on BNP Paribas SA down for a third day to 168 basis points.

“There were a lot of people betting on a French downgrade,” said Roger Francis, an analyst at Mizuho International Plc in London. “Shorts are being taken off on relief the downgrade didn’t have any impact.”

Glencore, Xstrata

The gap between credit default swaps on Glencore International Plc (GLEN) and Xstrata Plc (XTA) narrowed to an 18-month low of 39 basis points as the European Union is set to follow investors in approving the companies’ merger. Glencore fell four basis points to 198, the lowest since June 2011 and down from 548 a year ago, while Xstrata was little changed at 158 basis points.

The contracts will continue to trade separately after the merger, with Xstrata staying lower because it’s less liquid, according to Navann Ty, an analyst at Bank of America Merrill Lynch, who is overweight both companies’ derivatives.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings fell 3.5 basis points to 516. A decline signals improvement in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was unchanged at 170.5 basis points and the subordinated index declined three to 292.

A basis point on a credit-default swap protecting 10 million euros ($12.8 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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