LONDON (Bloomberg) -- The cost of protecting Valeo SA’s bonds from default rose on a report the French partsmaker is considering a leveraged buyout, saddling the company with added debt.
Credit default swaps jumped 24 basis points to 228, according to CMA DataVision prices.
That means it costs 228,000 euros ($276,518) a year to protect against default on 10 million euros of debt for five years.
Valeo hired Bank of America Corp. to advise on strategic options, including a major unit sale, a leveraged buyout, and a merger with a North American rival in a stock-for-stock deal, the New York Times reported today. The Paris-based company said it’s working with financial advisers to evaluate options to yield the “highest possible value.”
“An LBO looks like a feasible option,” said Jonathan Moore, a high-yield analyst at Evolution Securities Ltd. in London. “If private equity buys it, they could put a lot more leverage onto the business, making it a riskier proposition for bondholders.”
Kate Philipps, a Valeo spokeswoman, didn’t return phone calls seeking comment.
Buyout firms use the company they are acquiring to borrow most of the funds needed to pay for the purchase. Credit-default swaps are based on corporate bonds and are used to speculate on a company’s ability to repay debt. Their cost rises as the risk of default increases.
Positive first-half sales
Valeo yesterday forecast a 35 percent increase in first-half sales to about 4.7 billion euros. Operating margin will be “close to” 6 percent, the highest half-yearly level in eight years, the company said.
Valeo, with a market value of 1.96 billion euros, has 1.5 billion euros of bonds and loans outstanding, Bloomberg data show. The company has a credit rating of Ba2, two levels below investment-grade, from Moody’s Investors Service.
“An LBO is probably the most attractive solution for any potential investor but with a stake in Valeo held by the French state it’s unlikely in the short-term,” said Pierre Bergeron, a fixed-income credit analyst at Societe Generale SA in Paris.
Fonds Strategiques d’Investissement, a French sovereign wealth fund, and Caisse des Depots, a state-owned provider of pensions and mortgages, own a combined 9 percent of Valeo’s shares, according to data compiled by Bloomberg.