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Derivatives

AT&T Spreads Widen As Telecom Giant Cuts Earnings Estimate

The price of credit protection on AT&T Corp went up last week after the telecom corporate said its revenues will be lower than it had previously announced.

The price of credit protection on AT&T Corp went up last week after the telecom corporate said its revenues will be lower than it had previously announced. Five-year credit-default swaps traded last Wednesday at around 340 basis points, out from 245bps the week before, according to a New York-based trader. The trader predicted spreads will continue moving out.

As one of the largest and most liquid names, demand for AT&T swaps came from diverse clients, including real money accounts who own the corporate's bonds, as well as speculative participants such as hedge funds, the trader said. The move was also notable in an otherwise sleepy market ahead of the Federal Reserve's decision to raise interest rates. While protection on AT&T may not widen to the same levels as fellow telecom corporate MCI, which currently trades around 500bps, they are headed in that direction, the trader added.

Standard & Poor's gives AT&T a long-term rating of BBB on CreditWatch with negative implications and after the AT&T's announcement placed its short-term A-3 rating on CreditWatch with negative implications. Rosemarie Kalinowski, credit analyst in New York, wrote that the revision, "continues to demonstrate AT&T's challenging business risk profile due to industry pricing pressures and the aggressiveness of the regional Bell operating companies in the small and midsize business and consumer segments." She noted, however, that the corporate has accelerated the deployment of voice over Internet protocol services that could mitigate some loss of market share.

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