The price of protection on U.S. hospital operator HCA blew out more than 300 basis points last week after the company agreed to the biggest-ever leveraged buyout. The announcement of the USD33 billion deal launched by Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity and HCA management surprised the market, traders and analysts said. Five-year credit-default swap protection--which had traded between 150 and 170 basis points all year--jumped to 225 bps Friday when rumors started leaking and spiked to 475 bps Monday when the announcement was made.
As DW went to press Thursday, spreads were tightening and traders said they were starting to see two-way flow. "Everyone was looking to get out of credit earlier in the week," said one New York trader Wednesday afternoon, adding later in the week players took advantage of the wide spreads to sell protection.
There was particular interest in selling CDS under one year. "It's free money," said one trader, noting little risk in the short term. The buyout will be funded with debt and will subordinate existing debt, but it will not be completed until the fourth quarter of 2006 and poses no risk of imminent default.
All three ratings agencies put the company on watch for possible downgrade and said they expect to cut their ratings by several notches when the deal is completed later this year. Currently, Standard & Poor's and Fitch Ratings rate HCA BB plus, and Moody's Investors Service rates it Ba2. "A transaction that results in a significant amount of incremental financial leverage could result in a multiple notch downgrade of Moody's ratings," said Dean Diaz, v.p. and senior analyst at Moody's in New York.
