Credit-default swap spreads on mmO2, the mobile phone company spun off by BT Group last year, blew out last Wednesday morning after the company announced its first annual results, which were characterized by what investors perceived as slow revenue growth. Default swap spreads on five-year mid-market protection widened to 400-410 basis points on Wednesday morning from 340-360bps at the start of trading.
Traders said they were surprised that spreads widened so drastically, since most of the results were better-than-expected--at least from a credit perspective. Revenue growth in the U.K. of less than 2% was worse than expected for equity investors, who are more sensitive to companies' growth prospects as could be seen by the 12% tumble in mmO2's stock price Wednesday.
There was speculation that the large jump in pricing on credit protection was driven by a few large trades, since mmO2 is an illiquid name. John Pearce, senior investment-grade telecoms analyst at Dresdner Kleinwort Wasserstein in London, said there was no obvious reason why spreads would move that drastically based on the results the company released. "Our best guess would be that one or two big holders of the bonds bought protection," Pearce said, adding that he had no knowledge of any specific trades.
