Five-year credit-default protection on U.K. telecom company Cable & Wireless blew out 100 basis points Wednesday before tightening to about 70bps wider than the previous week. The move comes amid concern over the telecom operator's accounting practices, which also caused similar widening in the cash bond market and sent its shares to a 12-year low. Mid-market default swaps were quoted around 250bps Thursday, from roughly 180bps earlier in the week.
At issue is Cable & Wireless' booking of bandwidth sales as revenue, which follows U.K. accounting standards but is being criticized in the wake of Enron's collapse. "Cable & Wireless is sticking to the letter of the law, but whether it's the spirit of the law is debatable," said one trader. Another added bid/offer spreads have been as wide as 30bps. "Everyone's running scared of what's now known as Enronitis and no one wants to stand in front of a speeding train," he said. The company responded to the sharp falls in the equity and credit markets Wednesday by issuing a statement, which defended its accounting practices as legitimate.
Roger Harvey, credit derivatives analyst at JPMorgan in London, said Cable & Wireless' accounting practices have created concerns for investors. Investors are scrutinizing company accounts given recent events whereas they had previously not paid as much attention. "There's really been a change of emphasis and much more of a focus on the details," he noted.
Moody's Investors Service rates Cable & Wireless A2 and Standard & Poor's has it at A.
