Cingular Wireless' credit default swaps were little changed on Friday after the company reported better-then-expected second-quarter results, and while analysts may disagree how many challenges lay ahead, most believe its swaps have little upside.
Cingular Wireless said on Thursday that second-quarter net income and revenue rose as the No 1 US mobile service provider added new subscribers at a faster-than-expected pace.
The cost to insure Cingular's debt for five years was around 20 basis points on Friday, or $20,000 per year to insure $10 million in debt. The swap has widened from around 17 basis points in March, after AT&T Inc said it would buy BellSouth Corp in order to acquire the 40 percent of Cingular that it did not already own.
However, in spite of the minor widening and the company's strong earnings, Cingular's swaps have little margin for improvement, analysts said.
"We believe Cingular will be able to continue making improvements and narrow the gap against Verizon Wireless - although the pace of improvement going forward could be slower," CreditSights analyst Zhiping Zhao, said in a report.
However, "while Cingular will continue to improve, the five-year CDS is trading rich relative to its ratings," she said. Barclays Capital analyst Hale Holden agreed that Cingular's swaps are "offering limited upside potential," though he recommended the company's long-term debt maturing 2031, "despite tight levels."
"We expect Cingular's fundamentals to be stable to improving, based on solid wireless industry growth through 2008," Holden said in a report. Moody's Investors Service is also likely to upgrade the company by one notch to "Baa1," based on the better credit metrics of its parent AT&T, he said. Gimme Credit analyst Dave Novosel, however, sees some clouds on the horizon. "We must admit that the financial results have been better than we expected. However, Cingular still faces some hurdles," he said in a report.
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