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Continental CDS move to upfront on liquidity fears
Debt protection costs on Germantyres and auto parts maker Continental AG soared onWednesday with the risk of default deemed so high that anupfront payment is now needed to buy credit default swaps.
'In addition to the weak economic environment and high levelof debt, weakening cash flow will probably add pressure to thecompany's liquidity,' said Pierre Bergeron, a credit analyst atSG CIB.
Trading upfront means the perceived risk of default is sohigh that most of the cost of buying protection is covered by adown-payment instead of by payments each year over the course ofthe contract.
Five-year CDS on Continental were bid at 17.75 percentupfront and offered at 18.75 percent, up from around 900 basispoints late on Tuesday, Markit data shows.
Taking the mid-point, an investor buying protection onContinental would have to pay upfront around 1.83 million euros($2.4 million) to protect 10 million euros of the company's debtagainst default.
Continental shares were flat at 39 euros at 1600 GMTfollowing news that privately owned Schaeffler Group planned tosell stakes of 10 to 20 percent in Continental to keep a pledgewhich limits its shareholding.
The firm, which is rated BBB- by Standard & Poor's and FitchRatings, had 13.1 billion euros of debt at the end of 2007,which is expected to fall to 11.9 billion at the end of 2008, SGCIB estimates.
Most of that is made up of loans, the bulk of which maturein 2010, although there are bonds worth 370 million eurosmaturing by the end of 2008, SG said.
The ratio of total debt to earnings before interest, tax,depreciation and amortisation (EBITDA) was around 5.5 at the endof 2007, forecast to ease to 4.2 by the end of this year,although that may be difficult for the company to achieve,Bergeron warned.
According to guidelines from Standard & Poor's, a triple-Brated credit should have a debt to EBITDA ratio of 2.2, headded.
Continental is now the second constituent of the 125-nameinvestment grade iTraxx Europe index to tradeupfront.
The other is Swiss commodities firm Glencore ,which is bid at 33.5 percent upfront and offered at 34.5percent, Markit data shows.
The global auto industry is under increasing pressure as aresult of the global slowdown, with even the top players notimmune. Japan's Toyota Motor Corp. (7203.T: Quote, , Research, ) had its ratings cutfor the first time in a decade on Wednesday as Fitch stripped itof its triple-A rating and assigned an AA rating with a negativeoutlook.
CDS in Fiat, for example, is trading at around 985 basispoints, according to Markit data, on concerns about its exposureto South America.
About two-thirds of the company's operating profit isderived from Brazil, although the company is not as highlyindebted as Continental, Bergeron said.
'In addition to the weak economic environment and high levelof debt, weakening cash flow will probably add pressure to thecompany's liquidity,' said Pierre Bergeron, a credit analyst atSG CIB.
Trading upfront means the perceived risk of default is sohigh that most of the cost of buying protection is covered by adown-payment instead of by payments each year over the course ofthe contract.
Five-year CDS on Continental were bid at 17.75 percentupfront and offered at 18.75 percent, up from around 900 basispoints late on Tuesday, Markit data shows.
Taking the mid-point, an investor buying protection onContinental would have to pay upfront around 1.83 million euros($2.4 million) to protect 10 million euros of the company's debtagainst default.
Continental shares were flat at 39 euros at 1600 GMTfollowing news that privately owned Schaeffler Group planned tosell stakes of 10 to 20 percent in Continental to keep a pledgewhich limits its shareholding.
The firm, which is rated BBB- by Standard & Poor's and FitchRatings, had 13.1 billion euros of debt at the end of 2007,which is expected to fall to 11.9 billion at the end of 2008, SGCIB estimates.
Most of that is made up of loans, the bulk of which maturein 2010, although there are bonds worth 370 million eurosmaturing by the end of 2008, SG said.
The ratio of total debt to earnings before interest, tax,depreciation and amortisation (EBITDA) was around 5.5 at the endof 2007, forecast to ease to 4.2 by the end of this year,although that may be difficult for the company to achieve,Bergeron warned.
According to guidelines from Standard & Poor's, a triple-Brated credit should have a debt to EBITDA ratio of 2.2, headded.
Continental is now the second constituent of the 125-nameinvestment grade iTraxx Europe index to tradeupfront.
The other is Swiss commodities firm Glencore ,which is bid at 33.5 percent upfront and offered at 34.5percent, Markit data shows.
The global auto industry is under increasing pressure as aresult of the global slowdown, with even the top players notimmune. Japan's Toyota Motor Corp. (7203.T: Quote, , Research, ) had its ratings cutfor the first time in a decade on Wednesday as Fitch stripped itof its triple-A rating and assigned an AA rating with a negativeoutlook.
CDS in Fiat, for example, is trading at around 985 basispoints, according to Markit data, on concerns about its exposureto South America.
About two-thirds of the company's operating profit isderived from Brazil, although the company is not as highlyindebted as Continental, Bergeron said.
