Credit Markets Update: Tyco curve inverts on CIT spin-off delay concerns

A potential delay to the planned spin-off of CIT, the financial services unit of Tyco, caused five-year debt protection spreads on Tyco and CIT to balloon 200 basis points this week, and Tyco’s credit derivatives swaps curve to invert.

A statement made today by the US diversified industrial manufacturer, which followed a Securities and Exchange Commission (SEC) investigation of ex-Tyco chief Dennis Kozlowski, stirred rumours that the CIT float would not now occur by the end of June. Tyco had previously stated the floatation would take place at the end of the month, but today made no mention of target date, stating only that the spin-off would take place “as expeditiously as possible”.

The cost of five-year credit protection on Tyco widened to 730bp/790bp today as the company’s credit default swaps curve inverted. Credit protection on two-year Tyco debt saw bids of more than 1,000bp with no offers. Five-year credit default swaps on CIT traded at 450bp/500bp.

The SEC launched a formal investigation into spending decisions made by Kozlowski on Tuesday. This followed the former chief executive’s decision to resign Monday, which caused Tyco’s five-year protection spreads wider to 590/650bp from 550bp-mid – the average trading level during the past month. Five-year credit protection on CIT widened about 25bp to 275bp/300bp also on Monday.

Spreads widened a further 140bp on Tyco and 175bp on CIT yesterday and today as the market reacted to the implications of the SEC investigations and the potential delayed spin-off, said John Piluso, a trader at GFInet in New York. “When a company is down, Wall Street will just come in and crush it,” he said.

In Europe the cost of protection on France Telecom widened 30bp during the past couple of days following the debt-laden French telco’s forced purchase of 103 million shares in mobile-phone subsidiary Orange from German utilities company E.On. The deal, priced at €950 million ($892.6m), poised further questions about France Telecom’s ability to reduce its debt, traders said. The cost of credit protection on five-year France Telecom widened to 390bp/420bp over Libor today, said credit derivatives traders in London.

E.On exercised an option to sell the shares to France Telecom following an agreement reached between the two companies entered into in November 2000.

Elsewhere in Europe credit default swap spreads on telecoms were generally tighter, as were autos. But traders in London today said that the markets saw quiet sessions with light flows this week.