American credit market outlook

After a week of rife speculation about AT&T Wireless flirting with suitors, strategists and traders say the credit quality of any purchaser would be a key factor in the reaction of its credit spreads.
AT&T Wireless' spreads snapped tighter this week after reports that rival Cingular Wireless was considering buying the operator, raising hopes for consolidation in the crowded industry.
Even as the initial Cingular rumours faded from the immediate spotlight, other names began to circulate in the quest for AT&T Wireless, the third-largest US wireless telephone company.
They include no less than Vodafone Group Plc, Japan's NTT Docomo Inc, T-Mobile, the wireless arm of Deutsche Telekom and Nextel Communications, along with BellSouth Corp and SBC Communications, which jointly own Cingular.
Credit default swap traders said the spreads for AT&T Wireless had established a floor after the heavy trading of this week's volatile rally, which drove its five-year spread to about 62 basis points, or $62,000 a year for $10 million of default protection.
That spread is easily the lowest in the past year for the wireless carrier and is down a whopping 77 percent from peaks around 110 basis points back in late November.
AT&T Wireless' credit spreads and stock were hurt back then after widespread complaints about how it was handling cell phone number portability, prompting an inquiry by the Federal Communications Commission.
Among the potential buyers, T-Mobile is seen as less interested in making a formal offer because Deutsche Telekom is still trying to reduce its debt load.
A purchase by junk-rated Nextel Communications would likely drive wider the spreads of AT&T Wireless, which is rated at the lower-end of investment grade by the major credit ratings agencies.
Standard & Poor's rates Nextel BB-minus, while Moody's Investors Service rates it Ba3 - both with a positive outlook.
On the other hand, if Cingular emerges as the likely buyer, AT&T Wireless' spreads could tighten further, one credit derivatives trader said. Another trader said the rally had gone about as far as it could, even with a Cingular purchase.
SBC Communications is rated in the upper reaches of investment-grade territory, at A1 by Moody's and A-plus by S&P, while BellSouth has the same ratings.
Of course, plenty of other issues will have to be sorted out if such a combination were to take place, including integrating equipment, customers and all in what would prove to be a messy process, traders said.