American credit market outlook

Altria Group Inc's credit spreads may still have room to tighten once the cigarette maker announces its spinoff of Kraft Foods Inc, but its bonds may already have priced in much of the future credit improvement. Altria, the parent of Philip Morris USA, has said its board plans to finalise its decision and the timing of the Kraft Foods spinoff by January 31.
While the spinoff is expected to improve Altria's credit profile, the company's spreads have already tightened substantially over the past year as worries about litigation associated with its Philip Morris unit have eased. Altria has long said it is seeking clarity in the US litigation environment before spinning off its 88.6 percent stake in Kraft.
"The month-end announcement will be a positive credit event, but most of the spread tightening has already occurred," said Gimme Credit analyst Craig Hutson in a note to clients.
The cost to insure Altria's debt with credit default swaps has held steady at about 22 basis points since last November, meaning that it costs $22,000 per year for five years to insure $10 million in debt. But Altria's default swaps steadily tightened throughout last year, dropping from 60 basis points early on to 35 basis points in August and then 22 or 23 in November.
"Altria's come in a lot in this market," said Mirko Mikelic, portfolio manager and senior credit analyst at Fifth Third Asset Management in Grand Rapids, Michigan. The main reason for the tightening has been a positive resolution to many of the company's legal hurdles, analysts said.
"After prevailing on the three major legal cases cited by the company as critical for its separation of Kraft, we don't believe it faces any further hurdles," Gimme Credit's Hutson said.