Credit-default spreads on Swedish and Swiss engineering concern ABB blew out last week and its curve inverted as buyers sought default protection on the company after a two-notch downgrade from Moody's Investors Service left it in a liquidity crunch. Five-year spreads widened roughly 300 basis points to 700bps Wednesday, with no offers, and the cost of one-year protection skyrocketed 500bps to 750bps.
Moody's downgraded the company's long-term debt two notches to Baa2 because of concerns it will have negative cashflow in the foreseeable future and traders said the market is pricing in even more cuts in ABB's rating. They added banks drove up the cost of one-year protection because of significant loan exposure, although they declined to specify which banks are particularly at risk. Credit derivatives professionals noted that the level of one-year default swaps indicates the market views the company as a significant short-term risk. "It's a lot like Marconi in that if they can survive the next 12 months the chances are it will survive," said one, with another adding, "the short-term is where the risk is." "It's an off-the-run credit with a fairly complicated capital structure that [Moody's] shined a spotlight at," he added.
