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EDS Protection Blows Out On Derivatives Concerns

Credit-default protection on Electronic Data Systems, the world's second-largest computer services company, widened about 200 basis points last week after analysts downgraded the company over concerns its free cash flow for the year will be wiped out by a USD225 million derivatives charge. Five-year protection rocketed to 500bps Wednesday from 200bps Monday. The blowout occurred after Merrill Lynch analyst Stephen McClellan said in a report that EDS, which earlier in the month already revised downward its earnings projections, would have even lower cash left over due to losses from over-the-counter equity derivatives transactions it had entered to hedge against its employee stock purchase program. McClellan was travelling and unavailable for comment.

Srini Dhulipala, credit derivatives flow trader at Morgan Stanley in New York, said EDS had widened as high as 290bps this summer after WorldCom, to which EDS had a large exposure, announced it had made massive accounting errors that soon led it to declare bankruptcy. Since then, spreads on EDS had gradually tightened due to bids from structurers of synthetic collateralized debt obligations. Spreads widened out again earlier in the month before exploding last week. "It's clearly gone one way, and it's clearly on credit concerns," Dhulipala said.

Five-Year Credit Protection On Electronic Data Systems

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