Tech Company Credit Risk Rises as Intel Fuels Recession Concern
By Shannon D. Harrington and Abigail Moses
Jan. 16 (Bloomberg) -- The risk of technology companies defaulting on their debt rose as slumping sales at Intel Corp., the world's largest chipmaker, fueled concern that profits will fall as the U.S. economy slows.
Credit-default swaps for the bonds of Dell Inc., the second- biggest maker of personal computers, rose to the highest in more than five years as investor confidence in their credit quality declined. Contracts on Freescale Semiconductor Inc., the mobile- phone chipmaker acquired in a leveraged buyout last year, rose to a record high.
Intel, the maker of processors that power more than 75 percent of personal computers, posted fourth-quarter sales that missed analyst estimates and said first-quarter revenue will fall short of a $10.1 billion forecast. The Santa Clara, California- based company dropped the most in more than five years.
Intel's results ``point to demand slowing, and if we do get into a recession here, IT spending overall could drop,'' said CreditSights Inc. analyst Frank Lee in New York.
Credit-default swaps on the Markit CDX North America Investment-Grade Index, a benchmark gauge of default risk that declines as sentiment improves, rose 1.25 basis point to 101.25 basis points in New York, Deutsche Bank AG prices show.
In Europe, the Markit iTraxx Crossover Index of 50 European companies with mainly high-risk, high-yield credit ratings, jumped 14 basis points to 421, according to JPMorgan Chase & Co. The Markit iTraxx Europe index rose 1 basis point to 68.5.
Ambac Contracts
Ambac Financial Group Inc. credit-default swaps moved further into distressed levels after the second-biggest bond insurer said it wrote down the value of securities it guarantees by $3.5 billion because of rising U.S. mortgage defaults.
Sellers of credit-default swaps on New York-based Ambac demanded 15.5 percent upfront and 5 percent a year to protect against a default for five years, CMA prices show. Yesterday, they traded at 11 percent upfront and 5 percent a year.
``While it is entirely possible, even likely, that a portion of the negative marks will eventually reverse, it is clear that losses are going to skyrocket,'' CreditSights analyst Robert Haines said of Ambac's writedown in a note to clients today.
Contracts on MBIA Inc., the largest bond insurer, rose about 4 percentage points to 16 percent upfront and 5 percent a year, prices from Phoenix Partners Group show.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
`Armageddon-like'
``The sentiment is Armageddon-like in credit markets,'' said Jochen Felsenheimer, head of credit research in Munich at UniCredit SpA, Italy's biggest bank. ``The majority of market participants are in full crisis mode, anticipating the worst.''
Intel's announcement clouded an outlook for technology companies that brightened earlier this week when International Business Machines Corp., the world's biggest computer-services company, reported fourth-quarter earnings and sales that exceeded analyst estimates.
``We're getting some mixed reviews at this point,'' Dave Novosel, a credit analyst who follows technology companies at Gimme Credit LLC in Chicago, said in an interview. ``We're going to need some more data points from these other tech companies to see where this thing might head.''
Intel fell $2.81, or 12 percent, to $19.88 in Nasdaq Stock Market trading.
Dell, Freescale
Credit-default swaps on Round Rock, Texas-based Dell rose 8 basis points to 61 basis points, according to Lehman Brothers Holdings Inc. Contracts on Austin, Texas-based Freescale climbed 60 basis points to 958 basis points, CMA Datavision prices show.
Credit-default swaps on Melville, New York-based Arrow Electronics Inc., the second-largest distributor of electronic components, climbed 10 basis points to 87, Lehman prices show, the highest in more than two years.
A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.
Contracts on STMicroelectronics NV, Europe's biggest maker of semiconductors, increased 5 basis points to 64, CMA Datavision prices show. That's the highest since June 2003, according to Credit Suisse Group. Espoo, Finland-based Nokia Oyj, the world's largest maker of mobile phones, rose 1 basis point to 38.
Contracts on Paris-based Thomson SA, the world's largest supplier of set-top boxes, rose 14 basis points to 204, according to CMA, the highest level since at least Sept. 2002.
IBM, based in Armonk, New York, may provide more clarity on the industry's outlook when it reports its full results tomorrow, said Lee of CreditSights.
`Currency Effect'
``The weak dollar enabled a lot of these tech companies to do well overseas,'' he said. ``If come tomorrow, you look and a lot of the upside was due to the currency effect, you're going to get a little more volatility'' in credit-default swaps prices.
A slowdown would exacerbate credit-market concerns about share buybacks by technology companies that are being funded with debt, Lee said.
``You add all these credit concerns on top of each other, and obviously'' credit-default swap levels are going to widen, he said.
Credit-default swaps on JPMorgan Chase & Co. fell 1 basis point to 73 basis points, according to Phoenix. The third-biggest U.S. bank said it wrote down the value of assets linked to mortgages by $1.3 billion, less than analysts had estimated. |
