Event risk stalks TMT sector

Event risk is stalking the credit markets today, and nowhere more so than in the TMT sector.

Time Warner Cable (TWC) and Cox Communications (COX) were the latest "victims' and the two worst performers in the US CDS market today after reports cited them as possible bidders for Charter Communications.

The reports appear to be based on quite tenuous information, but were nonetheless sufficient to trigger a strong market reaction. Time Warner Cable's spreads widened 22bps to 132bps, while COX's CDS widened 16bps to 50bps - quite a move for what is a strong BBB credit (COX trades with an implied rating of "A', according to Markit data).

Whether there is any credence to the stories remains to be seen, but what we can be fairly sure of is that the CDS market is currently very sensitive to event risk, particularly among TMT credits.

Dell's LBO, which was finally agreed by the board yesterday, has triggered a torrent of speculation around possible LBO targets - on both sides of the Atlantic. There doesn't appear to be anything concrete yet, though of course we cannot be sure what discussions are happening behind closed doors.

However, a deal was truck yesterday that does involve a good amount of leverage. Liberty Global announced that it was acquiring UK cable operator Virgin Media for an enterprise value of $23.3 billion.

Debt will be loaded onto Virgin Media's balance sheet, which had undergone a successful deleveraging programme in recent years. Virgin Media's CDS (Virgin Media Finance is the name traded in the CDS market) rocketed 130bps to 381bps after the deal was announced, and continued to widen today.

It seems that most of the action is emanating from the US, and this isn't surprising. Funding conditions in the US for buyouts are more favourable than in Europe; US banks are in better shape and the CLO market is returning to something like its former glory.

European banks are deleveraging and the CLO origination is still at a standstill. But that won't stop rumours from emerging and credits in certain sectors remain vulnerable to speculation-induced spikes.

Aside from TMTs, the broader market returned to the negative sentiment we saw on Monday. The Markit iTraxx Europe was 2bps wider at 117bps, meaning that it has given up 15bps since the tight point on January 11.

BP was the worst performer in the index following reports that it may face additional claims from several US states relating to its role in the Deepwater Horizon disaster. The total bill could be pushed up to more than double its current provisions. BP's spreads widened 10bps to 73bps.

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