High-yield in focus

European high-yield was in focus on Thursday as several events showed that idiosyncratic risk is highly relevant, despite the overbearing macro picture.

Alcatel-Lucent was the strongest performer in the Markit iTraxx Crossover index amid reports that Nokia is considering a deal with the French company. Nokia could acquire Alcatel's wireless business, which would create an industry giant to rival market leader Ericsson.

Interest from Nokia would probably have been seen as detrimental until recently - it was one of the more troubled credits in Europe. But the Finnish company is now a different proposition after it sold its phone business to Microsoft earlier this month. Its credit standing will be significantly stronger when the Microsoft deal goes through, which was reflected in its CDS spreads tightening over 300bps the day the news was announced.

Alcatel's spreads rallied by 42bps to 383bps following the reports. This is a far cry from the 1750bps it was trading at less than a year ago. A restructuring plan has been put in place by new management and asset sales have been promised. The company will need to deliver balance sheet improvement if it is to extend the rally.

Grohe Holdings is a high-yield credit in much better shape than Alcatel. In fact, it trades with an implied rating of BBB and its spreads were so tight that it was excluded from the latest Markit iTraxx Crossover series. Its turnaround was complete today after it was acquired by Japanese firm Lixil and Development Bank of Japan. Grohe's spreads tightened 32bps to 88bps; in July 2009 it was trading at just under 3000bps.

At the other end of the performance scale today was Ladbrokes, which widened 15bps to 290bps after the company issued its second profit warning this year. The firm blamed weakness in its online division, a worrying development given that it has already lost market share to rival William Hill.

Overall, the market was in retreat, with Italian names among the worst performers. The country's coalition government is looking ever more fragile as Silvio Berlusconi's supporters threaten to withdraw their support. The Markit iTraxx Europe was 1.5bp wider at 99.5bps.

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