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CREDIT COMMENTARY
Sep 03, 2013
Nokia spreads plummet on Microsoft deal
Credit default swap spreads on Nokia more than halved on Tuesday after the surprise announcement that Microsoft would purchase Nokia's mobile phone business for $7bn.
Shares in the Finnish phonemaker surged by more than 40% as investors viewed the Microsoft deal as a lucky last reprieve for offloading the ailing phone business.
CDS contracts on the firm were trading upfront on Monday at 1.35 points. Converted to spread using the Isda standard model, this translates to 534bps.
No longer trading as a distressed name, Nokia was being quoted in spread from early trading this morning and tightened by 322bps to 212bps.
Even though Nokia's spreads have tightened significantly after trading above 1,000bps as recently as October 2012, this is by far the largest spread drop for this name historically.
Limited success from its alliance with Microsoft helped generate 6.6 million smartphone sales in the fourth quarter of 2012, including 4.4m Lumia devices. These numbers, though not impressive by any means, helped spreads come down from all-time highs.
However, even after Tuesday's great performance the share price is still 90% down from its peak in 2000 when Nokia contributed almost 20% of Finland's total corporate tax revenue.
Microsoft on the other hand was punished heavily by stock markets on Tuesday as concerns were raised yet again by the software giant's persistence in venturing into low-margin device businesses. The US firm's share price dropped by 6% on Tuesday to $31.4 per share.
As expected credit markets were unfased, with huge revenue streams from its core enterprise, Windows and Xbox units and still sitting on more than $70bn in cash, CDS spreads remained flat at 40bps.
Spreads on the Markit iTraxx Europe index were trading flat at 104bps, while spreads on CDX.NA.IG tightened by 1bps from Friday to 83bps.
Frans Scheepers, CFA
Vice President
Markit
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