Credit investors may be best served by avoiding Whirlpool for now unless they know something the rest of the market doesn’t, analysts and traders said on Tuesday.
Whirlpool’s plan to absorb its smaller U.S. rival Maytag, a weaker credit, is one of several reasons to short the credit quality of the world’s biggest appliance maker, market participants said.
But many investors are already leaning in that direction, making it much more risky to short the name because any incremental positive news could spark a wave of short covering, which would drive spreads tighter, credit derivative traders said.
Meanwhile, going long the credit is not necessarily much of a bet either, they said.
“Everyone is short this name,” said a trader, who added he has a short in place, which means he bought default protection. “It’s a crowded trade.”
In fact, the cost of protecting Whirlpool debt against default for five years was quoted at 69 to 70 basis points on Tuesday, in slightly from 70 to 71 basis points the prior session.
Kristina Regan, credit analyst at CreditSights Inc., said it might make sense to “stay on the sidelines” with this credit until more certainty comes from the Maytag acquisition.
Regan said she cut her recommendation on Whirlpool to “under-weight” from “market-weight” back in July when the company’s intent to acquire Maytag was made known.
“There is a lot of news out there. It is a waiting game now,” Regan said.
She predicted Whirlpool will remain in the “BBB” area of the credit spectrum once it absorbs Maytag, but with the potential for a lot of ratings uncertainty in the process.
“They still have a lot of room for asset sales, job cuts, and moving operations overseas,” Regan said.
On Tuesday, Moody’s Investors Service warned it may cut Whirlpool by “multiple” steps depending on how well it integrates Maytag and what the resulting capital structure looks like.
Whirlpool’s senior debt is rated “Baa1” by Moody’s. Whirlpool’s ratings are also in question at the other two major ratings agencies.
Like many established U.S. manufacturers, Whirlpool’s credit quality is also under pressure from stiff competition from abroad, along with rising raw material and labor costs, analysts said.
In a research note on Tuesday. B. Craig Hutson, analyst at Gimme Credit, advised buying Whirlpool bonds with maturities out only to 2008, and buying protection at points further out the yield curve, given the risks of the acquisition.
There also has been market speculation recently that Whirlpool might be a target of a leveraged buyout, which tend to degrade credit quality.
Whirlpool was one of 29 high-grade companies named by Banc of America Securities in a research note on Monday as being particularly vulnerable in the current market environment to LBO risk.
Whirlpool spokesman Steve Duthie declined to comment for this report.
From Reuters
