Credit protection on tobacco behemoth Altria blew out Wednesday after legal woes started to emerge on its subsidiary Philip Morris USA. Five-year credit-default swaps on the name widened to 225 basis points last Wednesday, compared with 145bps the day before, after the Florida Supreme Court announced it will review a USD145 billion class action suit against U.S. cigarette makers, according to a New York-based trader. An appeals court had previously ruled that a class action suit could not be pursued. The decision could affect various tobacco corporates including Philip Morris USA and R.J. Reynolds Tobacco Holdings.
Demand for swaps came from all types of clients, as end users were hedging their portfolios as well as absolute return funds shorting the name, the trader said. The move came amidst a general widening trend. "Stocks have been going down and bond yields have been going up and this is all bad news for credit spreads," the trader commented. The North American Dow Jones CDX High Volatility Index widened 15% to trade at 129bps Wednesday, compared with 115bps seven days previous, he noted.
Moody's Investors Service rates Altria Baa2 and has the corporate on negative outlook. Christophe Razaire, senior credit officer in New York, said it is too early to determine whether the new ruling will affect Altria's credit rating. He noted, however, that Moody's does not believe the decision increases the likelihood that a class suit action will prevail against the tobacco firm.
Five-Year Credit Protection On Altria
Source: JPMorgan
