Credit-default swap spreads on Aon Corp., a Fortune 500 insurance broker, skyrocketed last week after the company announced the Securities and Exchange Commission was looking into its accounting practices and said it may have to restate earnings for the past three years. Midmarket five-year default swap spreads jumped from 130 basis points Tuesday to as high as 475bps before retracing to 450bps by late Wednesday in New York. "It opened up 200 bid/no offer, an offer came in at 300 and got lifted and it kept going up," said one credit derivatives trader in New York. "The market will punish any company that has a story with guys in badges involved," added the trader, referring to the SEC investigation. The company also announced it was shelving plans to spin off its underwriting unit. Aon shares fell to USD14.77 Wednesday from USD21.38 Monday, with a 52 week high of USD44.80.
The handful of negative announcements is certainly what caused the ballooning in default-swap spreads, said Deenna Coyle, fixed-income analyst at Bear Stearns in New York. She added that Standard & Poor's could take action against Aon's ratings because of the shelved underwriting sale. Coyle added that given the current climate of concern regarding SEC and accounting-related issues, any company that falls under the microscope in these areas is likely to get punished by the market. "Any negative news and especially any mention of the SEC" is particularly of concern to investors right now, she said.
Moody's Investors Service has an A3 rating on Aon, with a negative watch, while S&P has it at single A and stable.
Mid-Market Credit Protection On Aon
