Danone CDS contract volumes spiked before merger report

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Almost USD 1bn in credit protection was written on Danone just days before the French food company became subject to acquisition speculation and revealed the collapse of its Chinese joint venture, Debtwire reports.

Danone’s CDS activity the week ending 27 September dwarfed other flows in Europe with the next most active name, British American Tobacco, attracting only USD 142m in net new notional contracts, according to the DTCC figures. Since May, no other non financial or sovereign has cracked the USD 500m mark in terms of changes to net notional protection written in a single week, according to DTCC data. The average change in net contracts written over that time period falls between USD 50-100m.

In previous weeks, Danone’s CDS volumes barely made a dent in the market with a net reduction of USD 18m in the week ended 18 September and a net increase of USD 57m across 11 new contracts in the week ended 11 September. DTCC data back to late May of this year shows that no other net weekly increase cracked the USD 500m mark.

Sellside and buyside traders downplayed the volumes noting that the large flows are not unusual on investment grade CDS. Rumors about the potential M&A deal last week fueled the uptick, they added.

Playing the curve

The cost of protection remained constant in the low to mid 40bps range during the buying spree last week only to spike 29 September when a blog reported that Danone was targeting US nutrition company Mead Johnson. The report cited sources claiming Danone had approached Lazard and JPMorgan for advice and new debt financing, respectively, for the transaction.

Subsequent media reports and a company statement debunked the merger speculation and the cost of protection tightened to around 58bps by the following day.

But before the deal speculation went public, investors put on separate trades at different parts of the curve to position for a potential steepening if the acquisition came to fruition, said a sellside trader and a buysider. Danone has an A credit profile, and was trading with an implied AA rating prior to the news, Markit said in a report.

No single dealer was putting through big tickets, one of the traders noted, saying they were largely USD 5m- USD 10m trades. “It’s a cheap short,” one commented. Investors piled into the Danone trading once momentum was there, a third trader commented.

Danone fell prey to headline risk again on 30 September when it disclosed that it was pulling out of its Chinese JV. The French company will sell its 51% interest in the Danone-Wahaha joint-venture to its Chinese partners, it said in a statement. The exit will end legal proceedings related to the disputes between the two parties, it added.

While spreads on Danone CDS whipsawed on the news double-whammy, its bonds barely moved. The company’s 5.25% bonds due 2011s traded 105.13-105.27 over the past three days and its 5.5% 2015s traded 109.34-109.80 over the same time period, according to Markit.

Danone declined to comment when asked for comment on the CDS activity. Lazard did not respond to requests for comment.

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