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Credit Protection On Safeway Underpriced, Say Traders

10 Nov 2003

Several traders said credit-default protection on the U.S. supermarket chain Safeway may be as much as 100 basis points underpriced, after default spreads on the supermarket giant failed to budge after negative news on the name last Monday.

Safeway was forced into dropping its yearlong plans to sell its beleaguered Dominick's Finer Foods supermarket chain last week, due to the failure of the bidders on the franchise to reach agreement with unions representing most of Dominick's employees. Stock prices on Safeway tumbled by around 5% on the news, however credit protection was unfazed, continuing to trade around 60bps, traders noted.

Safeway credit spreads are being held in by technical factors, but at some stage there is going to be news big enough to blow its spreads out, said one trader, noting that when it happens the move will be violent. Spreads are presently restricted by the credit's presence in structured deals and particularly by Safeway being a favorite for participants to short, said one trader. The credit is considered borderline high yield and eventually big news will come, even if it takes a ratings action, he said.

Fitch Ratings rates the supermarket BBB and placed the corporate on negative outlook, down from stable, following news of the labor strike. Michelle Barishaw, senior director in New York, said that in order to take Safeway off negative outlook the firm will need to see the resolution of the strike, as well as for it to successfully reintegrate the Dominick's chain into the franchise. While bad for business in the short term, the strike may have longer-term benefits in negotiating a better labor agreement and keeping costs down.

Five-Year Credit Protection On Safeway Inc

10 Nov 2003