Spread levels of five-year protection on Cendant Corp. tightened considerably last week in response to the success of the company's USD800 million convertible bond issuance. Before last Monday's issue, spreads on New York-based Cendant were at around 230/260 basis points, according to Greg Rosen, director, credit derivatives trader at Credit Suisse First Boston in New York. After Cendent tapped the market those levels narrowed by about 65bps, and by the day's end they were trading at 180/210 bps. On Wednesday, default spread levels were holding steady at 180/200bps, said Rosen.
Another credit derivatives trader in New York noted that there had been fairly active trading of five-year protection, with average notional sizes of around USD10 million. Buyers were mainly convertible hedge funds who were looking to isolate the equity in the convertible issuance, he added.
Cendant hit the private market with zero-coupon bonds due in 2021. The credit derivatives trader in New York said the success of this offering showed that Cendant has the ability to come to market and raise capital, which eased hedgers fears about the company, and caused spreads on five-year protection to tighten. He added that other companies that have issued convertible bonds, such as Enron and El Paso Energy, have also experienced a tightening in their protection levels.
Another factor that contributed to the tightening of Cendant's default spreads, according to another credit derivatives trader in New York, was the company's April 30 announcement that it had raised its projected earnings due to the fact that its business units, which are primarily in the real estate and travel sectors, continue to perform at or ahead of expectations. Also, the recent rebound in the equity and credit markets might have contributed to this tightening, the trader said.
One of the main reasons why Cendant's default spread levels had been so wide in recent months is the "accounting irregularities" that the former CEO of the company, Walter A. Forbes, had allegedly perpetrated, said the first trader in New York.
Source: Lehman Brothers
