Portugal Telecom rallies after merger

Portugal Telecom stood out from the crowd on Wednesday, with the rest of the market transfixed by the actions of politicians and central bankers.

The telecoms carrier announced that it had agreed to merge with Brazilian firm Oi to form a combined company (provisionally named CorpCo) with a market value of more than $7bn. Portugal Telecom's shareholders will hold about 38% of the combined group, if the transaction is completed.

As part of the deal, Oil will raise between €2.3bn and €2.7bn in new capital to strengthen the balance sheet of CorpCo. This helps explain the rally in Portugal Telecom's spreads - they tightened 93bps to 375bps.

CorpCo will have a lower debt ratio than a stand-alone Portugal Telecom, and the firm's commitment to a conservative financial policy is also encouraging. The Portuguese firm's dividends will be cancelled and it appears that Oi's maximum indebtedness target of 3X will be maintained.

Elsewhere, the focus was on Italy and today's no confidence vote. In the event, Prime Minister Enrico Letta won the vote comfortably after former PM Silvio Berlusconi staged a late retreat. The tightening in Italy's (248bps, -6) spreads and the effect on the broader market were modest as rumours that Berlusconi's position was unravelling circulated yesterday afternoon and were priced into spreads.

Mario Draghi's press conference today was also a damp squib. The European Central Bank president said nothing new and kept rates unchanged at 0.5%. The markets were looking for Draghi to elaborate on recent comments about a possible new Longterm Refinancing Operation, but he refrained from giving further details.

Attentions will now turn to the ongoing shutdown in the US and the debt ceiling deadline, which is just over two weeks away.

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