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Derivatives

Spreads Bump Out On AT&T After Downgrade To Junk

Credit-default swaps referencing U.S. telecommunications giant AT&T widened 40 basis points last week following the corporate's downgrade to junk by all three ratings agencies.

Credit-default swaps referencing U.S. telecommunications giant AT&T widened 40 basis points last week following the corporate's downgrade to junk by all three ratings agencies. Five-year credit protection moved out to 340bps last Wednesday from around 300bps the previous week, according to a New York-based trader. Continued issuance of high-yield debt by U.S. telecom corporates was one factor putting pressure on CDS spreads in the sector, he noted.

Protection was bought and sold by the usual market participants, including hedge funds, looking for arbitrage opportunities and real money accounts hedging their cash holdings, the trader said. Several accounts also purchased the Dow Jones CDX High Yield Index as a means of placing a macro hedge. The trader anticipates seeing further widening of AT&T spreads.

Fitch Ratings was the first rating agency to give AT&T a high-yield status, downgrading the firm to BB plus from BBB minus on July 22. Moody's Investors Service followed shortly thereafter, shifting it to Ba1 from Baa2 on July 29. Standard & Poor's completed the hat trick, lowering AT&T's rating to BB plus from BBB last Wednesday.

Rosemarie Kalinowski, an analyst at S&P in New York, cited continued weakening of AT&T's risk profile in the face of transformation in the telecom industry as a factor behind the downgrade. Increasing competition in addition to pricing pressures and wireless substitution have also negatively impacted the firm, she added.

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