Credit protection on U.K. rail operator Stagecoach is expected to fall in price after the company reportedly won a new franchise to run trains in the U.K. A London-based trader said before the rumor began circulating, bond investors and banks with loan positions had been snapping up protection, largely because the company issued a profit warning earlier this month. The franchise, which would allow Stagecoach to run trains in the southwest region of England for 20 years, would give the company a guaranteed source of income. The trader estimates this could push pricing on five-year credit default swaps on Stagecoach to the mid 300 basis points range from 410bps as soon as the information is confirmed.
Wadih Canaan, associate in credit markets research atJ.P. Morgan in London, said five-year credit protection on Stagecoach fell from the beginning of the year until the profit warning in March because it was popular in synthetic collateralized bond obligation structures. This is because it is an investment grade credit with a spread of approximately 400bps.
Moody's Investors Service put Stagecoach's Baa3 rating on watch for possible downgrade on March 5 after the profit warning. Standard & Poor's rates the company BBB. Guido Billstein, v.p. European transport analyst at Moody's in Frankfurt, said if the railway operator did in fact win the franchise, that would be good news for Stagecoach. But he cautioned the review of its credit rating hinges on whether the company can improve the performance of its subsidiary Coach USA and the joint venture with Virgin Rail Group, which runs trains in the west of Britain.
