The price of protection on Citizens Communications, the U.S. telecommunications company, widened 90bps last Tuesday to 310bps in response to a three-notch downgrade by two of the ratings agencies. Citizens' credit default swaps, which began the week trading at 260bps, had initially tightened 100 basis points on Monday in a knee-jerk reaction to the corporate's announcement that it would pay a special dividend and an annual dividend on its equity.
The initial positive reaction in the CDS market on Monday mirrored the response to the announcement in the equity market, said traders, who noted hedge fund interest in playing the equity against the CDS. By Monday's close, however, the market was pricing in an expected downgrade and spreads widened to 220bps from 160bps. "A downgrade of one notch was closer to market expectations," noted one trader. "The downgrades were seen as harsh," he added. Moody's Investors Service downgraded Citizens to Ba3, which is non-investment grade. Fitch Ratings also downgraded the name three notches to BB, below investment grade, from BBB. Standard & Poor's, however, rates Citizens at BBB, above junk rating, but market officials were expecting a downgrade from the agency as DW went to press.
John Culver, an analyst at Fitch Ratings in Chicago, explained an upgrade in the short term was unlikely. "Citizens needs to pay down debt at a more rapid pace than it looks like they will be able to do with the dividend payouts," he noted.
