Five-year credit protection on Lucent Technologies traded steadily higher last week on the back of its credit rating being downgraded and concerns about the company paying dearly when rolling over bank borrowings. Reports of a Securities and Exchange Commission probe into accounting practices at the firm also may have spurred activity, although Lucent issued a press release noting that it had itself flagged these issues with the SEC late last year.
Five-year protection reportedly traded as high as 390 basis points last week, from 260bps the week before. Both rating agencies cut ratings on the name at the beginning of the week, citing concerns about the near-term profitability of the company's business units as their customers become increasingly capital constrained. Standard & Poor's cut the company's long-term unsecured debt rating to BBB-, while Moody's Investors Service cut the company's rating to Baa3 from Baa1. The telecommunications technology company is in the process of renegotiating a USD2 billion revolving credit facility that is maturing this month and a USD2.5 billion bank facility planned for Agere Systems, a microelectronics unit that Lucent is planning to spin off this quarter.
Trades were in relatively small in number and size, said traders. Given the five year tenor, they were likely the result of players taking positions rather than hedging. By the end of the week, protection was being quoted at 375bps/450bps. With few parties interested in selling protection, trading activity ground to a halt.
