KPN rallies on rights issue

Political risk drove the credit markets wider yesterday, but the focus returned today to earnings and single name event risk.

Dutch telecoms firm KPN was the standout performer after it announced that it plans to raise €4 billion in equity capital through a rights issue. KPN was expected to tap equity markets for funds, as its investment grade rating was under threat. However, the €4 billion sum was larger than expected, which is good news for bondholders, but not so good for shareholders.

KPN's CDS tightened 28bps to 152bps, its best one-day performance for over a year. The stock, on the other hand, fell by as much as 25%, the most since it started trading on the Amsterdam exchange in 1994.

The aim of the capital increase is to reduce net leverage at the short-term expense of shareholders, so this type of rights issue is clearly a positive credit development. KPN should have no pressing requirement to raise senior debt, although it has indicated that raising funds through hybrid capital is a possibility.

News of the rights issue overshadowed disappointing fourth-quarter results. EBITDA and free cash flow were at the bottom end of expectations and the guidance given by the company contained less information than usual.

KPN has been one of the worst performing telecoms credits over the last 12 months, but the rights issue announcement today should buy it some breathing space.

Elsewhere, Dell's LBO appears to have been agreed by the various parties involved. This has been priced in by the CDS market, where Dell's spreads have widened more than 250bps to 430bps since the deal was first mooted.

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