Five-year credit default swaps spreads on Nortel Networks Corp. tightened to 265bps on Wednesday, recovering from a 75 basis point spread widening the week before. The telecom equipment maker's spread had widened to 300bps last week, from 225bps, when it announced a third delay in filing its revised financial results.
A trader said investors initially reacted to the possibility that the Canadian company may be forced to buy back its bonds because of a covenant, but then realized this was unlikely to drive the firm into default because of its standing in the Canadian market. He explained that some of the bonds contain a clause allowing the investors to put the bonds back to the company at par if it does not file its accounts.
The trader said, "It's going to be bumpy until Nortel can sign off on its financial statement." Hedge funds and bank proprietary trading desks were the main traders.
Standard & Poor's rates Nortel B minus. Moody's Investors Service, which rates Nortel at B3, placed it on watch for a possible downgrade in April when the company fired its ceo and cfo following an accounting scandal. Moody's analyst Paul Hsi said it will not decide whether to downgrade Nortel until it files its financial statement. But he added, "The number of delays here is really concerning."
