Dutch telecoms operator KPN was today's strongest performer in the European investment grade market - thanks to Mexican billionaire Carlos Slim.

KPN said this morning that America Movil, which is owned by Slim and has a 29% stake in the Dutch firm, had agreed to vote in favour of the capital increase announced earlier this month. The €4 billion in capital will come in the form of a rights issue and a hybrid security with €1 billion in equivalent equity.
America Movil's decision comes as a relief to KPN bondholders. When the rights issue was first announced on February 5, KPN's CDS tightened sharply from 180bps to 153bps.

KPN has underperformed nearly all of its western European peers in recent years, and its poor financial performance left it in danger of losing its investment grade rating. The timing and relatively large size of the rights issue came as a pleasant surprise to credit investors.

However, it didn't take long for the positive sentiment to dissipate. Many expected America Movil to block the rights issue due to the considerable dilution it would inflict on its holding, and KPN's spreads gave back much of their gains in the following days.

Today's announcement should price in the positive impact of the capital raising, and KPN's spreads duly tightened 11bps to 162bps. This is still wider than all of the telecoms names in the Markit iTraxx Europe, with the exception of Telecom Italia and Telefonica, both of which are affected by sovereign risk.

KPN faces a tough task in catching up with its rivals given its high debt burden and competitive, low-margin markets.

Conditions were more sedate in the broader credit world, with little movement in spreads on either side of the Atlantic. The Bank of England caused a stir when its latest minutes revealed that three members of monetary policy committee - including the Governor Mervyn King - voted for expanding the QE programme.

This triggered a major sell-off in the already weak sterling currency, though it had a negligible impact in the credit markets. The US Federal Reserve is scheduled to post its minutes later today, and they have a far greater potential to shift global sentiment.

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