Five-year credit protection on Sears Roebuck Acceptance Corp. narrowed to 250 basis points last Wednesday, in from 370bps where it had traded the previous day, on news it is considering selling its credit card business, said a New York-based trader. Reaction to the news was initially positive with spreads narrowing as tight as 200bps. Later in the day, however, Standard & Poor's announced it had placed the firm on negative watch, which blew spreads out to 275bps, before protection settled into a trading range of 240-250bps, he noted.
Hedge funds were active Wednesday morning, selling protection and unwinding basis trades, said the trader. Activity died down later in the day. Traders said further movements in the swap spread will depend on Sears' ability to get its USD6 billion asking price for its credit card business.
Jerry Hirschberg, director at Standard and Poor's in New York, which rates the firm BBB plus, said if Sears completes a sale of the business S&P will likely lower its rating and maintain the firm on negative outlook. The sale of the credit business would demonstrate a greater reliance on the firm's retailing operation, which faces a challenging future, he said. Sears' credit card business has historically been an important element in determining the firm's ratings and the loss of this operating income, which represented USD1.5 billion last year, would be an important negative factor, he concluded.
Five-Year Protection On Sears Roebuck Acceptance Corp.
