Fives Credit Swaps Tumble on Bets Contracts May Become Worthless

Derivatives traders are betting that French industrial engineering company Fives will refinance its debt out of a new holding company, leaving credit-default swaps with nothing to protect.

The insurance contracts fell more than 85 basis points this week to a record low of 113 basis points, according to CMA data.

That’s the biggest decline in the Markit iTraxx Europe Crossover index linked to speculative-grade borrowers.

Existing swaps are at risk of becoming “orphaned” after Fives told investors on Monday that it plans to refinance its 580 million euros ($685 million) of high-yield bonds with new securities next year. The company may create a new entity that could issue the bonds, Chief Executive Officer Frederic Sanchez said, according to Barclays Plc.

It appears that “the underlying entity will be left mostly debt-free,” Felix Fischer, an analyst at Lucror Analytics in Singapore, wrote in a note to clients. That “explains the strong tightening of the credit-default swaps.”

Fives is considering refinancing debt after French private equity firm Ardian sells its minority stake, spokeswoman Celine Morcrette said in response to questions from Bloomberg News. It has “no view” on how that would be structured, she said.

Sanchez said that a new entity may rank above Novafives SAS, which issued the current bonds and is referenced by existing credit-default swaps, Barclays analysts Maggie O’Neal and Nikhil Kunder wrote in a note to investors. They lowered their rating on the company’s bonds to market weight from overweight.

The company’s 380 million euros of notes due in June 2021 rose to a record 102 cents on the euro this week and were little changed on Thursday, according to data compiled by Bloomberg.

There’s “the potential for credit-default swaps to be orphaned as a result of current (still preliminary) discussions around the optimal future financing structure for the company,” the Barclays analysts wrote.

November 30, 2017, 10:06:03 GMT
By Katie Linsell; Edited by Shelley Robinson, Abigail Moses and Neil Denslow