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Reversion?

01 April 2019 by jbchevrel

Koninklijke KPN N. V. (KPN) was among best performers in iTraxx Main today, 5y CDS being tighter by 10bp, vs -2.7bp for the index and -1.8bp for the index fair value. It follows the -14bp move on Friday. This outperformance is due to beta, but not only. Indeed, on Friday, S&P upgraded KPN to BBB Stable from BBB- following the agency’s view that KPN credit metrics should cross its thresholds for a mid BBB rating despite potential restructuring charges. As a result, KPN is now Baa3/BBB. Management’s commitment to achieve a mid-term leverage below 2.5x likely helped that decision. S&P also commented on a potential bid from Brookfield Asset Management, which caused the CDS spread to soar (55->130) earlier this year. We tighten back today also as the probability of this deal looks to have decreased. Indeed, the agency said that such a development is sufficiently remote for now, for a few reasons. Firstly, it believes that KPN’s independent foundation would use its voting control to block any offer that could be dangerous for lenders. Secondly, it argues that the recently proposed legislation in the Netherlands could allow the government to intervene in such a takeover. That making the path to a deal more complex for Brookfield, we logically reverted tighter to 115 mid on the 5y, which is still top of the range, as the deal is still far from off the table.