The price of protection on Canadian paper, pulp and lumber producer Domtar Inc. blew out last week as an unnerved market scrambled to cover positions. No news has come out in the two weeks since the company reported weak fourth quarter earnings, traders said, but everyone last week suddenly decided to buy protection to cover bond positions. Five-year credit-default swap spreads closed more than 50 basis points wider at 593 bps Monday from 541 bps a week earlier, and bulged to 630 before snapping back in to close at 583 Wednesday. On Thursday, as DW went to press, the bid/offer was 555/575 bps.
"That name went ballistic," said one trader. Another trader said he expected spreads to head back out, but most said barring headlines it should trade tighter.
Daniel Parker, senior credit analyst at Standard & Poor's in Toronto, said Domtar faces significant challenges in the coming year, including a restructuring plan to get control of aggressive debt leverage, an unfavorable exchange rate, rising fiber and energy costs, overcapacity and weakening product demand. Parker lowered S&P's long-term corporate credit rating on Domtar Dec. 1 to BB minus from BB plus with negative outlook and said unless it reduces debt and resumes break-even cash flows, the rating could be lowered further. Moody's Investors Service Dec. 12 downgraded Domtar to B1 from Ba2 with negative outlook.
