Fortune Brand Credit-Default Swaps Tumble on Ackman Breakup
The cost to protect Fortune Brands Inc.’s debt dropped after the maker of Jim Beam bourbon said it will spin off its home and security division as a publicly traded company and sell or divest its golf unit.
The swaps declined to 166.9 basis points at 11:55 a.m. in New York, according to data provider CMA. That’s down from a high of 219.4 basis points last month as investors wagered that William Ackman’s Pershing Square Capital Management LP, which purchased 11 percent of the company in October, might cause Fortune Brands to become more leveraged. Now they’re falling because of speculation Fortune may be an acquisition target, according to Mikhail Foux, a credit strategist at Citigroup Inc.
“More people are concerned about acquisition, if there’s an acquisition by a better-rated company,” New York-based Foux said.
The company may have to repay debt because of covenants on its bonds related to a change of control, according to George Ashur, managing director of credit strategy at Societe Generale SA. “The question is how much of the debt will stay and how much will be allocated and how much will be paid off.”
The credit swaps also may be dropping because investors are concerned that the contracts will become “orphaned” after the breakup, Foux said. The swaps would have no underlying debt to protect and become largely worthless.
Contracts protecting a net $1.3 billion of Fortune’s debt were outstanding as of Dec. 3, according to the Depository Trust Clearing Corp., which runs a central repository for the credit swaps market.
‘Strategic Common Ground’
The Deerfield, Illinois-based company announced the plans for its home and security division and golf unit in a statement yesterday. Chief Executive Officer Bruce Carbonari said Fortune found “much strategic common ground” with Ackman.
Diageo Plc, the world’s largest spirits company, may be interested in buying some brands, Ashur said. Diageo spokesman James Crampton declined to comment on the speculation yesterday.
Moody’s Investors Service put Fortune’s ratings on review yesterday with “uncertain” direction and Standard & Poor’s put the company on CreditWatch “negative.” S&P rates the debt BBB- and Moody’s grades it Baa3.
“Fortune Brands’ credit profile could weaken following the anticipated divestitures and currently unknown capital structure for the remaining spirits business, which is currently weak for the rating,” analysts led by Jean Stout wrote in an S&P report today. The analysts forecast that earnings before interest, tax, depreciation and amortization will fall by about 50 percent for the year ended Sept. 30.
Fortune rose 85 cents to $62.61 New York Stock Exchange composite trading at 3:36 p.m. in New York.
Jobless Claims
The cost of protecting corporate bonds from default in the U.S. fell to the lowest level in a month as stocks climbed after a bigger-than-projected drop in jobless claims.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 1 basis point to a mid- price of 87.7 basis points, according to index administrator Markit Group Ltd. The S&P 500 rose 0.2 percent to 1,231.
The CDX index, which typically falls as investor confidence improves and rises as it deteriorates, is at the lowest since Nov. 5, when it ended at 87.6.
The Labor Department reported that the number of workers filing first-time claims for unemployment insurance payments fell last week, showing the job market continues to improve. Applications for jobless benefits decreased to 421,000, less than the 425,000 median forecast of economists surveyed by Bloomberg News.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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