The price of protection on Anheuser Busch nearly tripled Tuesday and traders reported as much as five times above-average credit-default swap trading volume on speculation the world's largest brewer was being targeted for a leveraged buyout. Five-year CDS spreads blew out from 11 basis points Monday to as wide as 30 bps Tuesday after European reports that billionaire investor Edward Lampert's Greenwich, Conn.-based ESL Investments was preparing a takeover bid.
"This is important in the context of a larger trend," said one New York trader. "It showed that tight-spread names are overly tight. People trade them as if there is no risk. This is a reminder that in reality there is a risk."
The news had a contagion effect, causing other tight names such as Home Depot, Pitney Bowes and Merck to widen, traders said, noting all kinds of investors were buying protection on investment-grade names. "Investors have become more wary of idiosyncratic risk," said another trader. On Wednesday, investors appeared to be discounting the possibility of an LBO and Budweiser spreads pulled in to 24 bps in the afternoon from 30 bps wides. But one trader noted, "People are still getting short for the small chance it could happen."
None of the ratings agencies took action on the news, but analysts said they were watching it closely. "Financial policy is an integral factor in our ratings process, particularly for investment grade companies," said Jean Stout, analyst at Standard & Poor's in New York. "We certainly will react if there is something more definitive than speculation." S&P has maintained Anheuser's A plus rating since 1997 and gives it a stable outlook. Moody's Investors Service rates it A1 with a stable outlook.
