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Some CDS Can Go Wider!

15 May 2015 by lberuti

Permira and Apax have decided to cash on their investment in NELOOK (New Look) the UK company that sells women’s clothing. It has long been in the cards, but so far, the preferred route seemed to be an IPO, and rumours that it was to happen imminently sent the NELOOK’s 5-year risk premium from the 250-300bps where it belonged to 200bps back in February. It was confirmed yesterday that the business will eventually be sold to Brait, the investment company of Christo Wiese, the South African billionaire. NELOOK’s bonds have change of control provisions, so investors who own them will be offered a way out whatever. The prospects for the CDS is a little more difficult to call. NELOOK said that current debt will remain in place for now and that the company will review financing alternatives in order to optimize the capital structure within the same leverage range. Brait is essentially a private equity vehicle, so they could push additional debt into NELOOK, which would inevitably send the CDS wider. Or they could set up a new finance company and replace existing debt with new bonds, which would raise the prospect of orphaning for the CDS referencing the current NELOOK and send it much tighter. Alternatively they could simply replace whichever amount of bonds will get put to the company by investors and use another financing vehicle to pay for the acquisition, which would leave the CDS unaffected. As a precaution, while they wait for more clarity, investors sent NELOOK’s 5-year CDS to its pre IPO rumours level.