Five-year credit protection on the Interpublic Group Of Cos. bounced out by over 200 basis points on March 7 on the back of worse than anticipated fourth-quarter earning announcements. Credit protection on the name blew as wide as 770bps, before recovering to 550bps Wednesday, noted a trader in New York. Interpublic default swaps moved in when the firm announced it would refinance a bond, resolving liquidity concerns.
The large portion of short trades outstanding on Interpublic may put pressure on the default swap and in turn result in further narrowing of spreads, predicted the trader.
Thomas Razukas, an analyst at Fitch Ratings in New York, which rates Interpublic BBB minus with a negative outlook, sees the advertising conglomerate's problems as stemming mainly from cash flow issues as well as high financial leverage. The company's refinancing of a bond issue is one step toward increasing the firm's liquidity. Fitch is now looking to Interpublic to complete its planned asset sale of subsidiary NFO WorldGroup, the proceeds of which will be used to reduce debt.
Interpublic has experienced significant operating problems in subsidiaries including Octagon, a motor sports business, according to Razukas. These, alongside higher costs, legal issues and bad debt expense have constrained margins. Although the company has undergone a restructuring to address its problems, the benefits of this to its earnings before interest, tax, depreciation and amortization have been more than offset by its decline in revenues and the problems at its subsidiaries, he concluded.
Five-Year Credit Protection On Interpublic
