Credit protection on Canadian paper giant Abitibi Consolidated blew out by 50 basis points last week over concerns the corporate is not able to implement a planned price increase for its newsprint. General industry concerns also contributed to the widening. Five-year default swaps traded at 360bps last Wednesday, compared with 310bps the week before, said a New York-based trader. The widening is expected to continue with protection on the name likely to fatten by another 50bps in the coming weeks, he predicted.
Most of the trading interest on the corporate was from protection buyers with most participants taking a negative view on the credit, said the trader. Interest in selling protection came largely from participants trying to monetize their short positions, he added.
Standard & Poor's rates Abitibi BB and has it on negative watch, it downgraded the firm from BB plus on March 4. Last week S&P issued a report casting doubts on the viability that newsprint products will continue to be investment grade. With weak demand for newsprint, producers are having a difficult time earning a reasonable return, the report stated. In order to improve its credit position Abitibi needs to significantly reduce its debt as well as benefit from better industry conditions. The firm also needs to maintain a more conservative financial profile and capital structure that it does currently, said S&P.
