American credit market outlook

Georgia-Pacific offered a pleasant surprise for credit investors on Friday by selling its building products distribution business for an after-tax gain of $780 million, to be used for debt reduction.
But traders in the credit derivatives market said the forest products company had a long way to go still in reducing debt and improving profits to levels that would allow ratings agencies to consider it for investment-grade status, though the company's ratings outlook could be raised.
One trader said an investment-grade rating for Georgia-Pacific remained "pretty far off."
Indeed, Standard & Poor's said George-Pacific remains "highly leveraged," still holding $10.6 billion of debt on its balance sheet, mostly due to the acquisition of bath tissue maker Ft. James Corp for more than $11 billion.
S&P rating Georgia-Pacific is BB-plus, at the upper edge of junk but with a negative outlook. While Moody's rates the company similarly at Ba2 and also with a negative outlook.
Georgia-Pacific has already made some strides, reducing debt by about $900 million last year and improving its total debt to earnings before interest, taxes, depreciation and amortisation. It has also gotten a better hold on its asbestos liabilities.
The company has struggled with poor pricing power generally for its products, but if the economic rebound is assured with a pick-up in hiring, default swap traders said Georgia-Pacific's earnings and ratings should turn up.
Georgia-Pacific's five-year spread in the credit default swaps market shrank sharply on the asset sale news, sliding to around 190 basis points from 225 basis points the day before. That means it costs $190,000 a year for $10 million of default protection.
But some traders expressed surprise that the spread fell so much, while others said various market players would start to buy default protection at these levels as a way of getting cheaper insurance on other paper producers with higher credit spreads. Such buying of default protection would push the spread wider
For example Bowater, the second-largest newsprint maker in the US and a major pulp producer, trades at a much higher spread than Georgia-Pacific, around 275 basis points. Bowater is also preparing to sell $250 million of floating-rate notes maturing in 2010.