Hedge funds and proprietary desks snapped up five-year protection on Eastman Chemical Co. after the chemical, fiber and plastics manufacturer warned Tuesday its earnings would be below expectations.
Eastman's stock price fell nearly 9% in the first two days of the week and its spread widened to around 37 basis points from 34bps after it announced it would not meet its fourth-quarter earnings target. In October, the Tenn.-based company said its fourth-quarter earnings would range between USD0.42 and USD0.63 per share, is now says it will fall below range that due to the high cost of chemical ingredients and energy. One trader said Eastman's spread will probably move further out.
Standard & Poor's rates Eastman BBB with negative outlook and Moody's Investors Service gives it Baa2 with negative outlook. William Reed, an analyst in New York, said Moody's rating and outlook will not change in reaction to the earnings warning announcement.
Reed explained the negative outlook reflects the difficulty Eastman has faced with improving the financial performance of its specialty businesses, such as its coatings, adhesives, specialty polymers and inks segment. He also cited elevated debt levels and the company's reliance on asset sales to reduce debt significantly. "But the company has had some success in paying down debt since March." "That gives us some comfort," he added.
