No feelgood factor in credit

If there was a feelgood factor from the birth of the royal baby it was hard to detect in the credit markets as spreads gave up early gains.

Perhaps the thriving betting market in the name of the newborn child - the biggest non-sporting event in Coral's history, according to the bookmaker - diverted the attentions of traders. It was a light day in terms of economic data and the eurozone's political situation was temporarily becalmed, so there were never likely to be wild spread gyrations.

Nonetheless, the world goes on, and the day was not without interesting news. Dutch telecoms firm KPN announced that it is selling its German operations to Telefonica for €5bn in cash plus a stake in the new, combined entity worth about €3bn, confirming rumours that circulated yesterday.

The proposed transaction is positive for KPN, and this was reflected in the company's CDS spreads rallying 15bps to 140bps, their tightest level since October 2012. KPN's credit metrics should improve post-deal, with some of the proceeds pencilled-in to reduce the firm's high debt burden. Leverage will consequently come down, though not by a dramatic amount.

It is hard to assess the full impact of a potential deal as KPN has yet to give further information on the group's future financial policy. The regulation situation is also uncertain - the European Commission's competition authorities will have to give their approval if the deal is to proceed. KPN trades in line with its BBB rating, according to Markit's implied ratings, and the execution risk could mean that further tightening is limited.

KPN was the standout performer in a mixed day for European credit. By mid-afternoon, the Markit iTraxx Europe was almost 2bps wider at 99.5bps, with Spanish and German banks among the laggards.

Spreads also retreated in the US, with the Markit CDX.NA.IG 1.7bps wider at 74.5bps. Lockheed Martin was one of the strongest performers after its earnings beat expectations and it increased its full-year guidance.

The US defence contractor hasn't yet felt the effects of the sequestration spending cuts, as many of its contracts are long-term. Lockheed's spreads tightened 3bps to 43bps, a level consistent with a AA rating rather than the Baa1/A from the agencies.

Attention will now turn to Apple's results due after the US close, and the markets will be eager to see if the disappointing earnings trend from technology companies continues.

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