Telecoms under the microscope

Telecoms credits were under scrutiny on both sides of the Atlantic in a relatively quiet post-Easter trading day.

Vodafone was reported to be a target for Verizon and AT&T in a joint bid that would value the UK firm at $245bn. Verizon would acquire Vodafone's 45% stake in their Verizon Wireless US joint venture, leaving AT&T to take control of the non-US assets.

The report cited "usually reliable people", so it would be unwise to give the story too much credence. But there have been rumblings around a deal on Verizon Wireless for some time, and the involvement of AT&T could provide a neat solution for the European business.

One of the question marks around the rumoured deal is why AT&T would increase its exposure to the European market, which is highly competitive and relatively low-margin. However, AT&T has previously expressed interest in Europe, though whether it had a transaction of this magnitude in mind is open to doubt.

The equity market proved to be more responsive to the story, with CDS spreads in Vodafone just 1bps wider at 87bps. Until we have a better idea of how a potential deal would be structured, it is difficult to assess the credit impact. Verizon's spreads did see some movement, widening by 7bps to 85bps.

Verizon would probably use cash and new debt to finance any deal, which would have a negative credit impact in the near-term. AT&T's CDS are less liquid (Markit Liquidity Score of "3'), and they were 1bp wider at 41bps.

Elsewhere, the majority of credits were tighter as the markets returned to normality following the extended weekend in Europe. Disappointing Markit manufacturing PMIs for Spain and Italy were shrugged off, as was the lower than expected US ISM survey released yesterday.

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