Credit-default protection on Avnet Inc. doubled last week after Moody's Investors Service downgraded the distributor of electronic components and computer parts two notches to Baa3 and left it on negative watch. Five-year default swaps doubled to around 600 basis points Wednesday from around 300bps Monday, according to traders. A spread blow-out is expected after a two-notch downgrade, but traders said this widened even further than normal. "The theory is that with the downgrade to Baa3, it will disappear from a lot of CDOs, and the Street won't naturally own protection," said one trader. Hedge funds and loan portfolios were the heaviest buyers of protection last week.
Avnet's most-recent earnings were 30% lower year-on-year. Avnet relies on financing that is subject to tight covenants and an asset-backed program that could hit triggers if the company's finances don't soon improve, said Rick Lane, senior v.p. at Moody's in New York and lead Avnet analyst. "There is some room, but not a lot of room, and in our view there are risks that could cause some further deterioration on the liquidity front," he added. In addition, there is a general downturn in the electronic components sector, which is hurting the company.