Five-year credit protection on Philip Morris U.S.A. exploded to trade as wide as 350 basis points last Wednesday, in from 180bps seven days previously. Movement on the name was motivated by credit concerns after its parent, Altria Group, was ordered by an Illinois court to post a bond of USD12 billion in order to appeal against a decision that holds the firm liable for misrepresenting the danger of its 'light' cigarettes.
The best case scenario for Altria is a two-notch downgrade, opined a trader, adding that there is a strong possibility of the firm's credit rating being reduced to junk status. In response to the lack of clarity and high number of possible scenarios for Altria's future there was not a dominant credit trade, said a trader.
Gregg Stein, spokesman at Standard & Poor's in New York, which rates Altria single A and has it on negative watch, agreed that there is a strong possibility of the firm being downgraded to BBB plus or lower if there is not a satisfactory resolution to the court dispute.
As of Dec. 31 the firm had approximately USD23.3billion in outstanding debt, of which USD14.4 billion was under the firm's Kraft Foods subsidiary.
The large amount of existing debt means S&P thinks the corporate will find it hard to raise the USD12 billion bond, Stein said. Nicole Delz Lynch, analyst at S&P in New York, added that if Altria cannot pay the court Philip Morris may have to file for bankrupcy.
Five-Year Mid-Market Protection On Altria
