Credit spreads on Maytag Corp. have weakened following news that retailer Best Buy Co. will no longer carry its appliances but market participants are divided over where spreads go from here.
Best Buy , the fourth-largest U.S. appliance retailer, said on Wednesday it would stop selling Maytag’s major appliances to make space for more popular brands, the latest in a string of bad news for Maytag’s credit investors.
“Maytag had already been having problems with its floor care products,” said Joe Morrison, a fixed-income analyst at ABN AMRO. “Now this action by Best Buy raises questions about the health of their major appliance segment.”
A spokeswoman for Maytag declined comment.
Days earlier, Home Depot said it would begin selling appliances from Korean company LG Electronics, intensifying competition against Maytag.
One trader said most of the bad news on the company is likely reflected in spreads, although some analysts expect more upward pressure on Maytag’s credit protection prices.
Maytag’s credit default swap spreads widened by about 20 basis points on Wednesday, although they recovered much of that weakness after Maytag said that Best Buy sales represented only 1 percent of its consolidated revenue.
A bigger concern is that Maytag’s ratings could be at risk because of declining market share, rising costs and heavy pension liabilities. Standard & Poor’s rates Maytag two steps above junk and has a negative outlook on the rating, signaling a downgrade is likely over the long term.
“We don’t believe they should be investment grade,” said Kristina Regan, an analyst for fixed-income research service CreditSights.
“Maytag in the past has had problems not being as quick to innovate as the other appliance makers,” Regan said, and Best Buy’s action is one reflection of that. “We’ve been very bearish on Maytag since June or July.”
One credit default swap trader said spreads already reflect the risk of a downgrade, and the fact that many market players already have short positions in the name should also limit damage if a downgrade occurs.
The cost of insuring Maytag’s debt for five years has surged from 105 basis points two weeks ago to about 155 basis points on Thursday, or $155,000 for every $10 million of principal protected.
“That seems to be a bit much,” said the trader. “They’re not going out of business, and liquidity is not an issue, so I think there’s going to be technical support for this name. I don’t think (spreads) are going to go much wider.”
From Reuters