TUI AG on Friday gained credit ratings from Standard & Poor's and Moody's Investors Service that reduced the cost of insuring against a default by the company, traders said.
S&P's BB+ rating is the highest in the "junk" category, and has a positive outlook, meaning the rating might rise over the next 12 to 24 months. Moody's rating is one notch lower at Ba2.
Five-year credit default swaps on TUI fell around 30 basis points on the day to 150 basis points, a trader in London said, meaning it costs 150,000 euros a year to insure 10 million euros of the company's debt against default.
"This is the best rating they could have hoped for: BB+ with a positive outlook," a credit trader in London said. S&P said in a statement the company's bonds were rated one notch lower at BB.
TUI needed to get a credit rating to avoid having to pay increased interest on bonds that it sold in 2004 when it was unrated.
TUI sold a 625 million euro 6.625 percent bond due 2011 that contained a clause under which the borrower promised to pay investors 75 basis points more in interest if it did not get a credit rating within 18 months of the sale.
It inserted a similar clause into a 400 million-euro 2009 floating-rate note it sold later in that year.
Elsewhere, the cost of insuring against default for debt in TDC, Denmark's leading telecoms group, stayed higher on Friday after a Danish newspaper article renewed leveraged buyout (LBO) concerns among credit investors.
But the report strengthened suspicions that Swisscom, which previous media reports have touted as a possible trade buyer, would not trump the private equity groups' bids, a telecoms trader said.
The article said a second private equity consortium considering an LBO of TDC, which includes Cinven, BC Partners, Apollo Management and Silver Lake Partners, was now a serious contender and had agreed to a financing package with UBS.
Five-year credit default swaps on TDC rose 10 basis points to 290 basis points, same as their level on Friday morning in London.
Bondholders are wary of LBOs, which are financed by loading a target company's balance sheet with debt, often prompting severe downgrades by ratings agencies.
Debt from TDC's rival TeliaSonera, the largest Nordic telecoms operator, was little changed after Standard & Poor's cut its rating on the group by one notch to A-, citing the group's "continued struggle against difficult conditions in its core Swedish and Finnish markets."
Elsewhere, the cost of credit protection on industrial engineering company ABB tightened further after the company said it is set to meet or beat its full-year profitability goals as third-quarter net earnings almost doubled.
Five-year credit default swaps on ABB was bid at 74 basis points on Friday afternoon in London, said a trader. They had already traded 3 basis points tighter from Thursday to 78 basis points on Friday morning.
"It's marginally tighter compared with the rest of the market," he said.
ABB, which turned profitable in the first half of 2005 after four years of losses, said orders grew 15 percent to $5.74 billion, while sales were up 13 percent at $5.65 billion.
In the cash bond market, General Motors' 8.375 percent euro bond due in July 2033 was 2 points lower on the day at 74 percent of face value.
The world's largest car maker said it was recalling nearly 106,000 sports utility vehicles in the US and Canada to fix a rear door latch that may not close properly due to corrosion. GM has been struggling under heavy benefit costs and poor car sales in North America.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 38.1 basis points more than similarly dated government bonds at 1421 GMT, 0.3 basis points less on the day.