Five-year credit protection on Cable & Wireless blew out by 500 basis points at the beginning of last week after Moody's Investors Service downgraded the credit to Ba1 from Baa2. Credit-default swaps spreads were trading at 350bps/400bps before the downgrade and opened at 750bps for mid-market protection on Monday, widening out further to 850bps/900bps on Tuesday. Volume increased from the typical handful of trades per week to approximately 20 trades in the inter-dealer market from Friday through Tuesday, said one trader. Generally, volumes were thin last week because of the approaching year end, they added.
The downgrade to high-yield credit was particularly detrimental to investor confidence in Cable & Wireless as it triggered a GBP1.5 billion (USD2.36 billion) contingent liability put in place when Deutsche Telekom purchased the company, said Vladlen Andriouchtchenko, senior analyst at Commerzbank Securities in London. The contingent liability means that Cable & Wireless is restricted from using GBP1.5 billion in cash. Andriouchtchenko said that in order for the outlook for the company to improve, it would have to gain access to that cash through a waiver of the contingent liability, bring its global division to cash-flow positive and maintain stable performance at its regional division.
