Five-year credit protection on Rolls-Royce blew out by roughly 70 basis points last week amid concerns over the U.K. company's amount of off-balance sheet debt as so-called Enronitis--skepticism over companies' accounting standards--swept the financial markets. Spreads on Rolls-Royce widened from around 135-155 basis points at the start of the week to 200-220 bps by Thursday. "There's a lot of nervousness everywhere and now you are starting to have real issues with the fundamentals and there's not a lot of confidence in some of the accounting out there," said one trader. An equity research report Goldman Sachs published Wednesday, which questioned the size of Rolls-Royce' on and off balance sheet debts, caused investors to hit the panic button and buy protection in droves. Goldman officials responsible for the report did not return calls.
Rolls-Royce appears to be a victim of concern that is sweeping the financial markets in Enron's wake and has been unfairly punished, according to Tassos Philippakos, senior v.p. and Rolls-Royce analyst at Moody's Investors Service in New York. "We don't necessarily see any accounting problems, although there are some suggestions, and we understand they have some off-balance sheet debt but that is of no recourse because they are joint ventures with other companies," he said. "I don't see anything sneaky in what they are doing and we are overdoing it if we start talking about [Rolls-Royce] in terms of [Enron]," he added. Moody's has the company at A3 with a negative outlook while Standard & Poor's has it at A minus, also on downgrade watch.
Five-Year credit Protection On Rolls-Royce
Source: J.P. Morgan
