Guessing the Tata game

Guessing the Tata game

So, how will Tata Steel finance its takeover of Corus? The company says it will disclose its funding plan later this month, and speculative theories about it are dime a dozen. One clue is provided by the recent movements in the price of Corus’ credit default swaps (CDS). These are an insurance against the probability of a default. CDS prices rise when the risk of default increases.

Bloomberg data shows that Corus CDS prices have fallen since 31 January, the day Tata Steel won the battle for Corus. CDS is based on the $1.8 billion of debt that Corus currently carries on its books.

The fall in Corus swaps shows that traders believe the Tatas will retire existing debt and perhaps go for a fresh round of borrowing through one of their own subsidiaries. So, there may be no Corus debt to insure against. The Tatas have already confused the credit derivative markets by the lack of clarity on how the takeover would be funded.

We’ll know soon if the markets have made the right call on this leveraged buyout.