Spreads on five-year credit default protection on Computer Associates International continued to widen last week due to the fallout over the company's May 4 announcement that a typographical error had caused it to overstate its annual earnings on operations. Greg Rosen, director, credit derivatives trader at Credit Suisse First Boston in New York, said on Wednesday that spread levels on five-year protection had been trading about 30 basis points wider over the course of the week, and that spreads were hovering at about 190/210 bp. Another credit derivatives trader in New York said that the spreads had been trading wider because investors continue to be concerned about Computer Associate's "aggressive" accounting.
The credit derivatives trader in New York said Computer Associates was a fairly active name in the credit default protection market last week. He noted that there had been at least 10 trades at around 190-210 bps, with average notional sizes of USD5-10 million, with demand mainly coming from hedgers. Protection on the company had narrowed after the company's incorrect earnings release in April, and he said he expected five-year protection on Computer Associates to remain in the near-term at levels of around 200-210 bps, which is around where the company's default protection had been trading in February and March.
Islandia, N.Y.-based Computer Associates is a software maker for mainframe computers. In its incorrect earnings release, the company said it had pegged operating earnings at about USD230 million. Its operating earnings for the fiscal year ended March 31 actually totaled USD90 million. Ira Zar, chief financial officer of Computer Associates, did not return calls seeking comment. A spokesman said the mistake occurred because an employee had accidentally transcribed an incorrect number in a news release.
