Credit-default swap spreads on tobacco companies blew out last week after confirmation that the U.S Department of Justice would bring a USD280 billion case against them this Tuesday. Spreads on British American Tobacco, which is connected to the U.S. market through its 42% stake in Reynolds American, reached a peak of 74 basis points last Wednesday, up from 64 bps on Monday.
Traders reported interest from funds and bank prop desks in the name. "On the offer side we've seen a lot of fast money," said a trader at a German bank. Market officials said the cash market had been caught long in the run up to the court date and there were some large sellers in the last week, triggering a rise in the price of BAT protection.
Moody's Investors Service rates BAT Baa1 with a negative outlook. Standard & Poor's puts it at BBB plus, but has it on stable outlook, while Fitch Ratings has it at A minus. Giulio Lombardi, corporate analyst at Fitch in London, said it is too early to say whether the rating will be affected by the trial. "[BAT's] geographic diversification is the best in the industry and allows it to absorb some shocks," he noted. However, Lombardi noted the court case could last some years. "I can't rule out the possibility of the rating being affected in the future," he added.
