Event risk makes a return

Event risk has returned to the agenda this week on both sides of the Atlantic.

German travel services firm TUI AG was active in the CDS market today amid reports that its majority-owned subsidiary TUI Travel was looking at a reverse takeover of its parent.

This caused TUI AG's spreads to tighten significantly on the possibility that a combination could leave a situation where there are no deliverable obligations for CDS. In other words, there would be no outstanding debt at the TUI AG entity level and TUI Travel wouldn't be the successor entity.

The speculation prompted TUI Travel to issue a statement confirming that the two firms were in early-stage discussions about a possible combination. However, it seems that if a deal is done it won't be in the form of a reverse takeover, but through a nil premium all-share merger. This caused TUI AG's spreads to retrace slightly, but they still ended the day 69bps tighter at 380bps.

TUI AG may still pay down debt if there is a merger, particularly if it can monetise the proceeds from the disposal of its Hapag-Lloyd shipping division. This perhaps explains the modest retracement in spreads post-announcement. More volatility can be expected as the story develops.

In the US, a different type of event risk has caused Boeing's spreads to widen sharply. The aircraft manufacturer has encountered several safety scares on its new Dreamliner model, the latest of which caused a Japanese pilot to make an emergency landing today.

Boeing now faces a number of investigations from various national aviation regulators, and the problems have undoubtedly damaged its reputation. Future sales of Dreamliners could well be affected and damage Boeing's credit metrics.

The company's CDS widened 10bps to 66bps today, meaning that it has given up nearly 20bps since January 4. It remains a strong single 'A' credit, but the uncertainty triggered by the recent incidents means it will have a risk premium attached to it until the situation is clearer.

Event risk aside, the day was dominated by results from JPMorgan and Goldman Sachs. Both US banks posted better than expected fourth-quarter earnings, but the news had little impact on the broader market. Sentiment picked up later in the afternoon and the main indices closed slightly tighter.

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