Credit portfolio managers and hedge funds pumped up the price of protection on global consumer conglomerate Sara Lee last week, in response to growing noise regarding a leveraged buyout of the firm. Five-year credit-default swaps on the name jumped to 100 basis points by end of trading Wednesday, from 50 bps at the start of the week.
At the peak of LBO panic during trading Wednesday, traders reported some accounts buying protection at 135 bps. Spreads pulled back in by the end of the afternoon, however, as participants appeared to take the view a buyout was not immediately imminent. "People overshot in the morning," said one trader, who noted opportunistic selling at about 120 bps also drove down the price.
The name is highly referenced in collateralized debt obligations, which also contributed to the panic, explained another flow trader. Volumes traded were high, agreed traders, who put estimates at around three times that of a normal week.
Accounts long Sara Lee bonds were buying protection, while short-term credit traders were taking straight short positions through buying credit-default swaps. Most were buying five-year CDS, but traders also reported interest in five- to seven-year and seven- to 10-year steepeners.
Moody's Investors Service has Sara Lee on negative outlook, with a rating of Baa1. It downgraded the firm from A3 June 15. Standard & Poor's has the corporation at BBB positive, with a stable outlook. Analysts Brian Weddington at Moody's andJayne Ross at S&P did not respond to messages by press time.