LBO rumour mill returns

The LBO rumour mill was back in full swing today amid reports that US supermarket chain Safeway is the target of several private equity houses, including Cerberus Capital Management.

Safeway's spreads widened 53bps to 255bps on the news, suggesting that the credit markets see a deal as plausible. The company often appears in LBO screening lists, and was taken private in the leveraged boom of the 1980s.

Safeway has just received regulatory approval to sell its Canadian division, and will soon be sitting on $4bn in cash. This may make it more attractive to potential suitors. The mention of Cerberus is also intriguing - the buyout firm already owns considerable supermarket assets and there could be potential synergies.

It is all just speculation at the moment, but the high risk premium attached to Safeway - it was already trading with an implied rating of 'BB' - indicates that the market sees it as a possible LBO candidate.

The broader backdrop is also favourable for leveraged deals: debt is cheap, the CLO market is reinvigorated and QE tapering is seemingly off the agenda until next year.

Staying in the US, a mixed set of earnings contributed to spreads widening today. Construction equipment maker Caterpillar (69bps, +3) was a major disappointment after it missed both revenue and profit expectations. To make things worse, it slashed its full-year earnings outlook, blaming a sharp decline in demand from the mining industry.

Caterpillar is a strong investment grade credit and can withstand a few bad quarters. However, its pessimistic forecast is more worrying for the wider economy, as Caterpillar is seen as a barometer of global economic health.

Reports that Chinese authorities are looking at tightening monetary policy in the face of a housing boom didn't help sentiment.

The Markit iTraxx Europe was 2.5bps wider at 86bps, while the Markit CDX.NA.IG was trading at 72bps, 2bps wider than yesterday.

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