The price of protection on telecom giant Cable & Wireless blew out over 50 basis points last week after its credit rating was clipped to BB minus from BB Wednesday. The Standard & Poor's action came after the announcement of an operational reorganization and negative profit forecasts for its U.K. unit in 2007.
Credit players across the board snapped up five-year credit-default swaps on the name, which drove spreads to around 300 bps, from 240 bps the week before. One trader said spreads first jumped to 260 bps on Tuesday when Cable & Wireless warned of flat core profits, announced it will create two self-contained U.K. and International units and shed group chief executive Francesco Caio. The rating downgrade triggered a further 50 bps steepening of spreads.
Another trader said a number of players put on curve steepeners, buying seven- or 10-year CDS protection at 335 bps and 365 bps, respectively, and selling five-year. Cable & Wireless' bid/offer spread was hovering around 10-15 bps for five-year protection, traders said. One official predicted spreads would continue to widen because the company is likely to be a private equity target and faces further credit downgrades. "There is still a lot of negative risk in the company," he said.
Simon Redmond, analyst at S&P, noted in a report Wednesday that Cable & Wireless' operational overhaul increases the likelihood of full separation between the domestic and international entities, which will in turn disadvantage bond holders. The company is rated Ba3 by Moody's Investors Service and BB plus by Fitch Ratings.
