Credit-default swap spreads on the telecommunications carrier Qwest Capital Funding tightened last week after Standard & Poor's upgraded Qwuest to BB minus from single B minus. Five-year protection on the name tightened from 725 basis points to 630bps after the upgrade was announced, noted a New York-based trader. Before the ratings action Qwest spreads had also been moving in on the back of a more general tightening trend, he added. It had traded at 775bps the previous week.
Most of the trading on Qwest was executed by hedge funds, noted the trader. The corporate has been making strong progress since coming out of bankruptcy, which is something of an anomaly in the industry. Competitors, such as MCI, which are negatively viewed in the equity market, are being subject to lots of convertible arbitrage plays and credit protection on these names is continuing to widen. Traders say Qwest is inexpensive relative to the rest of the market and its spreads could continue to tighten, he predicted.
Moody's Investors Service has the telecoms company at Caa1 with a negative outlook. Catherine Cosentino, analyst at S&P in New York, wrote last week that the ratings reflect the relatively good overall business risk profile of the corporate. Nonetheless, she noted that Qwest's progress is tempered by a lack of a national wireless presence and a fairly leveraged financial profile. This leverage is largely a legacy of cash draining from the corporate's long-distance business.
