American credit market outlook

Maytag Corp reported its earnings on Friday, and it is not clear if the company's problems will come out in the wash. The company reported an 80 percent plunge in quarterly profit, and halved its full year outlook. Its sales fell last quarter, and steel and energy costs jumped. Standard & Poor's responded by cutting the company's debt ratings to junk. Maytag is facing brutal competition from overseas appliance makers like Korea's LG Electronics.
"The real issue is their market share. They have to reduce their cost base and grow their revenue," said Todd Duvick, high grade bond analyst at Banc of America Securities in Charlotte, North Carolina.
The company hopes to buy itself some time by lining up refinancing right now for the $412.3 million of debt it has maturing in 2006. That is about 40 percent of its $970 million of long-term borrowings.
That may be a prudent move for the company, but it won't be enough, analysts said.
Maytag said it was working on a financing plan with banks to aggressively cut manufacturing costs, and added it recently reduced retiree benefits and would review its dividend.
"The biggest performance issue we have in terms of our operating margin is our manufacturing structure," Chairman Ralph Hake told analysts on a conference call. "Unfortunately, that fix is not an easy fix."
Even the refinancing could be a problem for bondholders if Maytag gets secured bank loans. That's a big negative for unsecured bondholders, because in the worst case scenario of Maytag filing for bankruptcy, secured lenders would have first crack at the company's assets.
Bankruptcy is unlikely for now, traders said. The company still has $98 million of cash, compared with about $60 million of annual interest expense.
That's why one trader thinks it might make sense to sell credit protection at current levels, which he thinks adequately compensate investors for their risk.
Protecting Maytag's debt against default for five years costs 300 basis points on Friday, or $300,000 a year for every $10 million of principal protected, up 80 basis points from Thursday.
But two analysts argued that the company's difficulties may mount, and with the potential for new financing to be senior to existing debt, it might make sense to buy protection on the credit.
A spokesman for Maytag was not immediately available for comment.