Five-year credit default swap spreads on Alcatel narrowed to 95 basis points Wednesday from 140 bps Tuesday after the company pulled out of a proposed merger with Lucent Technologies. Proprietary traders bought credit default swaps on Alcatel as the spread widened expecting it to continue widening if the merger went through, but as the deal was called off the spread came in.
Traders expected the credit to continue widening because Alcatel's credit rating was set to fall if the merger went ahead. Leandro de Torres Zabala, an analyst at Standard & Poor's in London, said Alcatel's credit rating would have fallen somewhere between its current single-A rating and Lucent Technologies triple-B minus rating. The credit was trading at 80 bps before the merger talks started three weeks ago. The typical notional size of the trades was EUR10 million (USD8.57 million) with a total of several hundred million going through the market in the last few weeks.
De Torres Zabala said the price of credit protection has not fallen to levels seen before the merger talks because there is still uncertainty. Alcatel may still buy Lucent Technologies' fiber-optic unit and separately 360networks looks set to pull a USD1.1 billion contract with Alcatel for underwater telecommunications equipment, according to de Torres Zabala. A decision is expected on the 360networks contract this week. Moody's Investors Service rates Alcatel A1.
Press officers at Alcatel declined comment about talks between the company and Lucent Technologies' fiber-optic unit and the status of the 360networks contract. Officials at 360networks did not return calls.
