Credit-default protection on AT&T Wireless Services blew out by roughly 150 basis points last week on fears the company's credit rating could get downgraded to junk status. Mid-market five-year default swaps referenced to the wireless company were trading at roughly 650 basis points late Wednesday, up from about 500bps at the start of the week. The widening occurred despite a generally positive tone in the default swap market due to strong demand from synthetic collateralized debt obligations. "AT&T Wireless has had a rough week, everyone is just real skittish on the sector and the credit," said one trader. Standard & Poor's added to the worries earlier in the week when it issued a negative forecast for the entire sector and said it would not turn around for possibly the next two years.
Andy Green, wireless fixed-income telecom analyst at Wachovia Securities in Charlotte, N.C., said that when S&P held a conference call last Monday about its downgrade of Sprint Corp.'s bonds, participants questioned the rating agency about the future of AT&T Wireless' rating as well. The agency would not talk about AT&T Wireless, Green said, and therefore many investors made the assumption that it would be downgraded, forcing cash credit spreads to blow out. S&P downgraded Sprint's bonds two notches to BBB minus from BBB plus on June 14. The sole reason the rating agency gave for the downgrade was weakness in the wireless sector, although the rating is on the entire Sprint group, Green added.
