Credit protection on Canadian paper giant Abitibi Consolidated blew out by 50 basis points on concerns the company is not able to implement a planned price increase for its newsprint. General industry concerns also contributed to the widening. Five-year default swaps traded at 360 basis points last Wednesday, compared to 310 over the week before, according to a New York-based trader. The widening is expected to continue with protection on the name likely to fatten by another 50 basis points in the coming weeks, he predicts.
Most of the trading interest on the paper company was from protection buyers, with most participants taking a negative view on the credit, adds the trader. Interest in selling protection came largely from participants trying to monetize their short positions, he notes.
Standard & Poor's rates Abitibi double-B and has it on negative watch; it downgraded the company from double-B plus on March 4. Last week, S&P issued a report casting doubts on the viability that newsprint products will continue to be investment grade. With weak demand for newsprint, producers are having a difficult time earning a reasonable return, according to the report. To improve its credit position, Abitibi needs to significantly reduce its debt as well as benefit from better industry conditions, says S&P. The rating agency adds the company also needs to maintain a more conservative financial profile and capital structure.