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Spreads Widen On Telecom Vendors After Ericsson Placed On Review

28 Apr 2002

Credit-default swap spreads on Ericsson and Alcatel widened in lockstep by approximately 40 basis points last week after Moody's Investors Service placed Ericsson's Baa2 and Prime-2 long- and short-term debt ratings on review. Traders said protection on both firms widened to 370bps/390bps for five-year mid-market protection on Tuesday from approximately 330bps/350bps on Monday. On Wednesday, the levels had tightened slightly to 365bps/380bps.

The rating review was triggered by a statement in which Ericsson said it would not return to profitability until 2003, according to the rating agency. In addition, the company announced a deeper-than-expected decline in order bookings. Alcatel is also rated Baa2 by Moody's with a negative outlook. Traders said default-swap spreads on the two credits tend to move in tandem. "Although [Ericsson and Alcatel] are in different segments, both are experiencing the same reticence of telecom operators to invest," said Wolfgang Draack, a Moody's analyst in Frankfurt.

One trader said he believes credit protection on Alcatel will get even more expensive as the vendor primarily caters to fixed-line operators and will not have the potential upside of manufacturing equipment for the next generation of cellular networks. Traders also noted that the pending rights offering from Ericsson is a positive credit event and might eventually help swaps spreads on it tighten again.

Traders said Siemens and Nokia also widened slightly because they are included in the sector, with Nokia trading at 52bps/59bps on Tuesday from 45bps/50bps on Monday. Likewise, swaps on Siemens widened to 43bps/48bps from 38bps/42bps.

28 Apr 2002