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HP Protection Widens On New Supply

31 May 2002

Credit-default protection on Hewlett-Packard widened more than 40% last week on the heels of a mammoth USD1.5 billion offering the technology company issued, according to traders. Five-year default-swap spreads widened roughly 40 basis points during the week, with mid-market protection jumping to roughly 130 basis points by late Wednesday from 90bps on Monday. The bond offering was increased to USD1.5 billion. "Their existing debt was fairly minimal and then these new bonds came and pushed out default protection quite a bit," said one trader in New York. He said there did not appear to be any credit-related reason for the higher cost of protection and attributed it solely to the technical factor.

In addition to the new supply, some observers said HP recently completed its merger with Compaq Computer and has yet to see the benefits of the transaction come to fruition. Dan Ilany, an analyst at Bear Stearns in New York, said the default-swap move--which tracked movements in the cash market--seems related solely to the technical factor, as HP and other hardware companies tend to have low levels of debt. On a broader basis, however, he said the merger might be a concern for some investors. "Mergers in the computer sector don't have a great track record and it will take time for it to be integrated," he said.

Moody's Investors Service rates HP A3 and Standard & Poor's has it at A minus.

Five-Year Protection On Hewlett-Packard

31 May 2002