Credit under the cosh

Credit was under the cosh today amid weak US economic data and signs that leveraged buyouts could be set for a return.

Very few European names escaped the onset of risk aversion, with only a handful of defensive names tightening. The widening in the main indices was modest by comparison, suggesting the Markit iTraxx Europe's 3bps skew has probably narrowed.

Most of the negative sentiment emanated from the US. The Empire State Manufacturing survey came in at -7.8 in January, confounding expectations of a flat reading. And spreads were already widening due to speculation about a possible leveraged buy-out of Dell.

The US computer maker widened dramatically yesterday following reports that it is in talks with several private equity firms. It is not the first time Dell has been mentioned as a possible LBO target, but it has been a while and in this instance the talks are "serious", according to reports.

The markets are certainly taking the rumour seriously, with spreads widening by more than 130bps in the last two days to trade at 330bps. Financing conditions in the high yield market are as favourable as they have been for some time, though whether a transaction of this size would get off the ground is another matter.

Even if a deal is a long shot, the rumour mill will probably lead to an LBO risk premium being attached to some mid-cap technology names. A credit such as Computer Sciences Corp, which has shown little correlation with Dell in the past, widened 21bps to 193bps.

However, attention may turn away from the tech sector tomorrow and back to big name banks, with JPMorgan and Goldman Sachs scheduled to report fourth-quarter earnings.

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