Expedia Default Swaps Climb to Three-Month High on Split
The cost to protect debt issued by Expedia Inc. (EXPE) surged after the biggest online travel agency by revenue said it will split into two businesses, giving investors a chance to own shares in its fast-growing TripAdvisor unit.
Credit-default swaps on the company’s debt jumped 17.8 basis points to a mid-price of 172.5 basis points as of 10:15 a.m. in New York, according to broker Phoenix Partners Group. The contracts are at the highest level since Jan. 10, according to data provider CMA.
In a succession event such as a division into two businesses, the company’s debt can remain whole with one entity or be split between each. The contracts tend to climb on succession events because of the uncertainty and because a smaller spun-off entity will likely have a worse credit profile than the parent.
“You have to ask how much leverage will remain with Expedia and how much will go with TripAdvisor,” said Dave Novosel, an analyst at Gimme Credit LLC in Chicago. Because TripAdvisor is a “relatively small entity in a growth phase,” the debt will probably stay with Expedia, he said.
If an entity takes on 75 percent or more of a company’s obligations that can be guaranteed by swaps, then the derivatives become linked solely to that entity, according to definitions published by the International Swaps and Derivatives Association. Otherwise, swaps are divided between the two.
‘Slower Revenue Growth’
After the divestiture, Expedia will have “slower revenue growth going forward, lower margins and higher leverage,” according to Novosel. TripAdvisor may also become a competitor if it starts a booking business, he said.
Expedia’s $749.8 million of 5.95 percent bonds maturing in August 2020 fell $2.40 per $100 of face value to $98.64, where they yielded 6.14 percent. Its shares rose $2.42, or 11 percent, to $24.82 in Nasdaq Stock Market Trading.
TripAdvisor, which includes 19 travel and advertising brands, will be spun off into a publicly traded company, Bellevue, Washington-based Expedia said yesterday in a statement.
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