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By Josie Cox
LONDON, June 24 (IFR) - The cost of insuring Vodafone's debtrose on Monday, after the group confirmed that it had agreed tobuy Germany's largest cable operator Kabel Deutschland forEUR7.7bn - a move that is expected to increase the Britishcompany's leverage.
By 0815GMT, Vodafone's five-year CDS had widened by 8bp or8.6% to 101.75bp, and was one of the biggest underperformers inthe iTraxx Main index, which was 5.5bp or 4.4% wider at129.25bp, according to Markit.
Vodafone's senior bond curve also broadened, although themoves were likely tempered by the transaction having alreadybeen flagged in the market for some weeks.
Its euro curve was bid between 0.8bp and 1.5bp wider versusswaps, its sterling curve between 2.6bp and 7.9bp wider, and itsUS dollar curve between 4.2bp and 5.9bp wider.
Earlier this month, Fitch warned that Vodafone could bedowngraded by one notch if it acquires Kabel Deutschland Holdingwithout taking other measures to reduce debt.
"The potential transaction would increase funds fromoperations adjusted net leverage to above 2.5x (2.4x at endMarch 2013), which we see as a key threshold for Vodafone'sA-/Stable rating," Fitch said.
On Monday, Mizuho strategists said they expected thetransaction to be financed through a combination of balancesheet cash and credit facility drawdown which will likelypressure CDS in the short-term.
They said they expect cash spreads to "widen in anticipationof future issuance to fund this transaction".
POSITIVE FOR KABEL
The impact on Kabel Deutschland's bond curve was moremarked, even though strategists said the transaction had largelybeen priced in.
Its 6.5% June 2018s were seen bid around 20bp tighter inspread terms at 343bp over mid-swaps and a cash price of 106.3.Its July 2017s with the same coupon, were around 18bp tighter at368bp over, or around 107.3 in cash, according to Tradeweb.
That suggests investors are unlikely to exercise their rightto put the bonds at 101. Both bonds are callable in June 2014,which would allow Vodafone to redeem the bonds then.
In the longer term, however, the deal is likely to be creditpositive for Kabel Deutschland because Vodafone is higher rated,analysts agreed.
Vodafone is currently rated A3/A-/A- by Moody's/S&P/Fitch,while Kabel Deutschland is Ba2/BB by Moody's/S&P.
If Kabel Deutschland shareholders approve the offer, it willmean that Vodafone has snatched the company from under the noseof John Malone's Liberty Global which recently entered thebidding fray.
The combination of the two companies will result in a groupwith EUR11.5bn of pro-forma revenue in Germany, from 32.4million mobile, 5 million broadband, and 7.6 million TVcustomers, according to Reuters.
The transaction now also raises questions about the futureof Vodafone's tie-up with Verizon in the US.
Market sources have in recent months speculated that Verizonis weighing the possibility of a buyout of Verizon Wireless fromVodafone.
In April, two sources told Reuters that VerizonCommunications is mulling a 50:50 cash and stock bid of aroundUSD100bn for the 45% stake in Verizon Wireless it does notalready own. (Reporting By Josie Cox; additional reporting by NatalieHarrison and Robert Smith, editing by Julian Baker)
