A pair of sell-side paper industry analysts say spreads could still widen on bonds of newsprint manufacturing companies even though they tightened following last week's downgrades by Moody's Investors Service of the top two North American producers, Bowater Inc. and Abitibi-Consolidated. Mark Altherr, analyst at Credit Suisse First Boston, remains cautious on the names even though both high-yield and high-grade credits have been improving in recent weeks. "It's hard to go against the flow, but I see no near-term support for credit improvement in these names. If spreads in general come under pressure, these will come under a lot of pressure," he says.
Both names actually traded up after the downgrades, a fact Altherr attributes to short-covering. The Abitibi 8.55% notes of '10 were bid at 355 over the curve last Tuesday, in 40 basis points from pre-downgrade levels. Bowater's 7.95% notes of '11 tightened some 50 basis points after the downgrade--to 380 over the curve.
Michele Finder, analyst at Merrill Lynch, believes the credits traded tighter because Moody's dropped them only one notch, while many in the market may have been expecting more. She says Bowater's high levels of total debt, which was 10.2 times EBITDA over the last 12 months, will eventually cause spreads to widen and to trade comparably with NorskeCanada, which has similar debt-to-EBITDA ratios. NorskeCanada's 8.625% notes of '11 (Ba2/BB+) were trading at 484 basis point over Treasuries last Tuesday. However, she believes Abitibi, which has a total debt-to-EBITDA ratio of just 5:1, is fairly valued at last Tuesday's levels.