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The Birth Of A Giant

02 March 2015 by lberuti

Most of the names traded sideways in the credit market today. Given the tight level of the risk premia, that can only be described as undeniable strength. One rare wobble came from NXP (NXP Semiconductors NV). The company announced overnight that it is buying Freescale for $11.8Bln, in a combination of cash and stocks. It aims to expand its market share in chips for cars, surfing the trend pointing to vehicle that drive themselves. The deal will be funded with $1bln and $1bln in new debt, which means an increase in net leverage from 1.7x to 3.5x. The initial reaction was to send the 5 year CDS 20bps wider. But there has been a lot of short risk positions built recently in the name in anticipation of such an operation, making it one of only a handful of names trading hardly tighter since the beginning of the year. Now that the deal turning two challengers into a giant has materialised, this CDS felt pretty squeezy and it closed only marginally wider at 149bps (it is wider as what some see on their screen as all the risk premia in DataGrapple are computed using a 100bps running coupon, and not the 500bps which is standard on NXP).