Cooper Tire & Rubber Co.'s yield curve inverted Wednesday as five-year credit-default swap spreads continued to widen. The credit deterioration picked up steam throughout last week in the wake of disappointing earnings and the resignation of its ceo August 3. Five-year spreads reached 580 bps as DW went to press, up from about 450 basis points the day before the announcements.
Spreads at 10 years were yielding 30 bps over their five-year equivalent before earnings, but dipped 20 bps below five-year spreads Wednesday. "That's a bad sign," said one New York trader. "It means all the problems are in the near term." Some hedge funds were looking to put on flatteners and other curve trades, traders said. But most investors were simply interested in buying protection. Demand was strong across the curve, with particular interest in one-, three- and five-year maturities.
Ed Weist, senior analyst at Moody's Investors Service in N.J., downgraded Cooper two notches from Ba3 to B2 August 3. Standard & Poor's followed August 4 with a two-notch downgrade from BB to B plus.
"It has been several quarters since the company was able to cover its interest expenses from operating income," Weist said, citing rising raw material costs, decreasing tire replacement demand and uncertainty about the company's leadership as reasons for maintaining a negative outlook. "Spreads just keep going wider," said one trader. "It's a vicious cycle."
