By Carol Dean
A handful of deals surfaced in the European primary bond market
Thursday but the cost of insuring European corporate debt was mixed
after Spain was downgraded by Moody's Investor Services Inc.
Wednesday from A3 to just one notch above junk status.
Moody's said it will keep Spain on review for a possible further
downgrade, and it now rates Spain the lowest among the three big
ratings firms. Worsening economic conditions were cited as the
primary reason for the downgrade.
Spain's downgrade was a fresh reminder of the risks facing Italy
as the country sold a total of 4.5 billion euros ($5.63 billion) in
three different bond auctions Thursday, seeing decent demand of
EUR7.47 billion ($9.36 billion).
But the Italian government's borrowing costs soared at the bond
auction, a development that will make it more difficult for Prime
Minister Mario Monti to avoid having to seek financial help from
other euro zone members.
"We are fast approaching the point where both Spain and Italy
may have to be removed from the market," said Gary Jenkins, credit
strategist at Swordfish Research. "Unless there is a move towards a
fiscal union or at least temporary common euro bonds the most
likely way of doing this is for the ECB to buy in the secondary
market and for the ESM to buy in the primary market. But that might
not be enough firepower unless the EU increases the size of the
firewalls," Mr. Jenkins said.
Against this backdrop, deal flow was light in the European
primary bond market.
"Risk aversion remains firmly in place as we head into an
unusual Friday, that won't coincide with the last working day of
the week this time around," said analysts at TD Securities. "The
Greek election on Sunday is enough of a key event to keep all eyes
and ears focused on Athens until Monday morning, when the ballots
will be official," the analysts added.
Non financial issuers were in view in the primary market.
MTU Aero Engines Holding AG (MTX.XE), a German aircraft-engine
maker, is to price its EUR250 million ($313.3 million), five-year
bond at 165 basis points over midswaps and Swiss food company
Nestle S.A. (NESN.VX) is planning a benchmark-size, U.S.
dollar-denominated, five-year bond. Initial price guidance is 40-45
basis points over midswaps.
In the high yield market, U.K. nursing homes operators Four
Seasons Healthcare set price guidance on its two-part
sterling-denominated, junk bond. The GBP350 million ($544.45
million) seven-year, senior secured bond has pricing to yield 8.75
to 9% while the eight-year GBP175m ($272.22 million) unsecured bond
is to yield 12.5%.
Around 1130 GMT, the iTraxx Europe index, which comprises 125
high-grade borrowers, was one basis point wider at 183/184 basis
points while the Crossover index of 40 mostly sub-investment-grade
European corporate borrowers was 0.50 basis points tighter at
707/710 basis points having opened three basis points wider.
Write to Carol Dean at carol.dean@dowjones.com
(Sarka Halasova, Emese Bartha and Ben Edwards contributed to
this article)