DuPont CDS spreads hit 12-month wides

Fri Jul 26, 2013 1:17pm EDT

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NEW YORK, July 26 (IFR) - DuPont CDS spreads pushed out wider again Friday to 55bp, deteriorating to their worst levels in 12 months as the US corporate giant faces questions about the future of its performance chemicals unit as well as possible interest from activist shareholder Nelson Peltz.

The company's 5-year credit default swaps (CDS) eroded 41% in one day last week after a report that Peltz's Trian Fund Management had an eye on DuPont, and have slipped another 34% since this week's announcement that it is considering a spin-off or sale of the performance chemicals business.

In this case, however, the steep CDS decline appears to be connected to those two events, and not to market fears about a debt default or the company's overall creditworthiness.

DTCC data show DuPont's net notional amount of outstanding CDS - essentially protection bought by investors against a possible default - last Friday hit its lowest level in 12 months.

"We expect DuPont's financial policies following any transaction [for the performance unit] to remain unchanged, and its credit metrics to be commensurate with the current ratings," said S&P, which left the company's A rating unchanged following the announcement.

In the four weeks before the latest developments, DuPont 5-year CDS averaged around 33bp - and the sharp widening looks to be overdone. The company's cash instruments have been resilient, with short- to intermediate-dated bonds trading steadily above par. Like much longer duration debt at the moment, DuPont's longer dated bonds have declined modestly.

"While it is difficult to predict the potential outcome and spreads may remain elevated until there is more certainty, chemicals analyst Brian Lalli remains constructive on DuPont, given that the company has publicly committed to its A ratings," Barclays said in a note this week.

It is too early to predict the impact of any change in strategic focus to CDS, and there has been no regulatory filing from Peltz's hedge fund regarding its potential position in DuPont. In the meantime, the company's CDS spreads likely will continue to push wider until there is some further clarity.

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