Credit-default protection widened 400 basis points on Gap after speculation that the largest U.S. clothing chain was at risk of violating its loan covenants. Credit derivatives traders reported that the clothing company was among the most heavily traded last week despite overall low volume in the run up to Christmas.
Spreads on Gap, which owns Old Navy and Banana Republic, widened to about 800bps last Wednesday from 400bps a week earlier as bulge-bracket firms looked to buy protection. "Gap is really unraveling. It's gotten ugly," one trader said. He added that just four weeks ago Gap spreads were hovering around 200bps but quickly began moving out as bad news about the company continued to mount. On Dec. 11 Moody's Investors Service warned it was considering cutting Gap's credit rating from its current rating of Baa2, which is a mere two notches above junk status. The warning was followed recently by a conference call during which Gap told analysts it would continue to record weak earnings until the third quarter.
Diane Shand, analyst at Standard & Poor's in New York, expects Gap's problems to continue because potential customers have not responded well to its new ranges. She added, however, that because of the company's strong cash flow generation there is still the potential for a second half recovery in 2002. Shand said the company would continue to struggle through the first half of the year.
Five-Year Credit Protection On Gap