The price of protection on Canadian paper producer Abitibi Consolidated blew out and traders reported twice normal trading volumes after the company reported worse-than-expected earnings Wednesday morning. Five-year credit-default swap spreads widened more than 50 basis points to nearly 600 bps as players scrambled to buy protection.
"Earnings were terrible and people think it might default," said one New York trader. "I thought earnings would be down, but not this much." Abitibi's EBITDA dropped nearly 40% to USD113 million from USD169 million in the second quarter, and its stock fell 5.5% to USD2.90 per share Wednesday from USD3.07 Tuesday.
Traders were most concerned about Abitibi's impending debt maturities. The company is responsible for USD17 million this year and USD1.092 billion in 2008. "They have enough cash to cover maturities for the next year," a trader said. "But where are they going to come up with USD1 billion? Their market cap is USD1 billion."
Allen Dea, treasurer at Abitibi in Montreal, said the firm believes it can meet these liabilities. He noted, for example, it is set to receive a USD235 refund of softwood lumber deposits this quarter and also it is in the process of selling an interest in an income fund it is offering. He added that it also still has access to bank lines. "Last quarter was a difficult one but that does not mean the next quarters will be," he said, adding, "We are confident."
Spreads pulled in about 15 bps to 585 bps Wednesday afternoon from morning wides. None of the ratings agencies changed their ratings or outlook immediately after the earnings were published. Moody's Investors Service rates Abitibi B1 and Fitch Ratings and Standards & Poor's rate it B plus.