Credit-default swap spreads on Ericsson tightened last week by around 75 basis points to 470bps even though the company's fundamentals have not improved. Traders attributed most of the tightening to yield hungry investors snapping up cross-over credits, adding that British Airways also came in to around 450bps from 575bps at the beginning of the month. Trading was light throughout the default swap market, with about USD10-15 million a day going through the broker market on both BA and Ericsson.
"I am not convinced that Ericsson's profile has improved," said Stuart Reid, technology analyst at Fitch Ratings in London. Fitch downgraded the corporate to BB minus from BB on May 6, noted Reid, adding, "[In] the first half of the year Ericsson's rating was generous."
Ericsson has revised down its expectations for the mobile equipment sector to a reduction of more than 10% from a reduction of less than 10%. In addition, its performance was below the market average last year, according to Reid.
On a positive note, the company has reduced its costs base, which can be seen in its first quarter results. It also has a huge cash pile, some SEK67 billion (USD8.65 billion). "[It] can get comfortably through 2003 and get through 2004," noted Reid.
Traders expected that Ericsson might attempt to issue a convertible bond, after seeing the success of rival telecom company Alcatel. Alcatel increased the size of its convertible bond last week to EUR1.02 billion after it was over subscribed. The bond has a coupon of 4.75%. Reid said if Ericsson issued a convertible to retire bonds or fund restructuring it would be seen as a positive move.
Five-Year Mid-Market Protection For Ericsson