By Melissa Mott
NEW YORK, Oct 23 (IFR) - The cost of insuring Safeway Inc's
debt against default rose sharply on Wednesday on a
report that buyout firms are exploring a deal for all or part of
the supermarket chain.
Safeway's five-year credit default swaps (CDS) widened as
much as 54.5 basis points to 256bp, a six-month wide. During
that time, the spread has ranged between 155bp and 230bp.
Reuters reported Tuesday that buyout firms including
Cerberus Capital Management are interested in the business.
It could potentially shape up to be one of the largest
leveraged buyouts since the financial crisis.
"It is all just speculation at the moment, but the high risk
premium attached to Safeway - it was already trading with an
implied rating of BB - indicates that the market sees it as a
possible LBO candidate," Markit's Gavan Nolan said in a comment.
Safeway is rated Baa3, BBB and BBB- by Moody's, S&P and
Safeway, the second-largest US mainstream grocery chain with
a market value of over US$8 billion, is not running an auction
currently but is aware of buyout interest and reviewing options
with advisor Goldman Sachs.
An LBO offer typically widens a company's CDS due to the
potential that the buyout candidate will take on a significant
amount of debt financing and sink into junk territory as a
result of higher leverage.
A credit default swap will readjust higher to compensate for
the higher risk of default.
Worries about Safeway sliding into high-yield have
intensified in recent months, particularly after Moody's changed
its outlook in June to negative from stable.
That move came after Safeway said it would sell off its
operations in Canada, which Moody's said raised questions about
the company's ability to boost operating earnings.
Safeway's bonds, most of which have change of control
language that limits the downside risk for investors, fell on
Wednesday. Change of control covenants allow for redemption in
case of a takeover.
The 5.00% 2019s, which contain change of control language,
declined two points to $104.25, but the senior unsecured 7.25%
2031s, that do not have change of control, plunged in price to
$100.49 from Tuesday's close of $107.75.
One swaps trader said any takeover could push Safeway's CDS
spreads out to test the November 2012 wides of 400bp.