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The Heat Is On

30 April 2018 by lberuti

Once again today was a day where credit index variations were minimal. That was probably to be expected given that part of Europe is off tomorrow and people had already squared their portfolio last week ahead of month end. It did not prevent some big moves of the risk premia of certain corporates though. The biggest of all in Europe was not good news for bondholders of GALAPG (Galapagos Holding S.A.), a member of iTraxx Crossover since series 22. GALAPG is owned by funds managed by Triton, a private equity group. It is the holding company for the operating companies of Galapagos SA, which is a global manufacturer of heat exchangers for industrial applications in sectors ranging from oil and gas to food and beverages. GALAPG released their 4th quarter results this morning, which shown a poor operational performance compared with earlier guidance for that period. But more importantly for credit investors, they also announced they breached some covenants on one of their revolving credit facilities and had to get an equity injection of 22M€ from their sponsor. The company’s 5-year risk premium shot up almost 6 upfront and now stands at 22pts upfront plus 500bps running – that is roughly the equivalent of 1,200bps -. The market estimates that GALAPG has a 65% probability of defaulting over the next 5 years. That is the highest level since its CDS started to trade actively 3 years ago.