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Derivatives

British American Tobacco Spreads Widen On Philip Morris Case

Credit protection on British American Tobacco blew out last week in reaction to a widening of default swaps spreads on Philip Morris U.S.A. the week before. Traders said five-year mid-market credit protection on BAT widened to 190 basis points last Monday from 130-140bps the previous Friday. Although spreads tightened slightly to 160-180bps midweek, the default swaps were trading at 190bps again by Thursday. Philip Morris default swaps spreads jumped to around 620bps at the end of March from 300bps earlier that week, traders said. Philip Morris protection was trading at 500bps Thursday.

Investors bought protection on Philip Morris as a result of an Illinois court order on its parent Altria Group to post a bond of USD12 billion in order to appeal a decision that holds the company liable for misrepresenting the danger of its light cigarettes (DW, 4/7). Traders said buyers were hedging positions on Philip Morris by scooping up swaps on BAT at a lower premium. Jonathan Todd, senior credit analyst at JPMorgan in London, explained that BAT's American subsidiary, Brown & Williamson Tobacco Corp., has an identical court case pending in the same jurisdiction that is due to come to trial next year.

The credit fundamentals of BAT are strong, however, said Todd. In addition, the underlying attitude toward tobacco companies in most U.S. jurisdictions has improved, but the market continues to be spooked by litigation in the U.S., Todd said. "We will continue to see the disconnect."

Five-Year Mid-Market Credit Protection For BAT

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