Five-year credit-default protection referenced to R.J. Reynolds Tobacco Holdings widened to 400 basis points Wednesday, out from 350bps the previous week. The blow out followed an announcement on April 25, that it had slashed its earnings forecast for the year as a result of tough conditions in the tobacco industry, said a trader in New York. Immediately following the announcement, credit default swaps on the name traded as wide as 475bps.
R.J. Reynolds' protection prices moved against a general tightening trend, buoyed by improving market conditions and, with the exception of tobacco corporates, better earnings statements, said the trader. The week also saw the re-emergence of loan portfolio buyers snapping up protection, which contributed to the overall tightening, he said.
Wesley Moultrie, senior director at Fitch Ratings in Chicago, which rates R.J. Reynolds BBB and has it on ratings watch, noted that the firm's woes are largely influenced by those of the tobacco industry in general. The high level of competition coming from discount manufacturers, the higher price of cigarettes, as well as issues such as the heightened risk of litigation against tobacco firms, makes it difficult for individual players to grow earnings. Although R.J. Reynolds has made efforts to cut costs, its reported earnings were significantly lower than Fitch had anticipated and it is likely the rating agency will downgrade it, Moultrie concluded.
