CSC’s five-year credit default swaps tightened about 18bp, or 10%, on Tuesday to 147.5bp, according to Markit, after more than doubling to 185bp on Monday – its widest level since early 2013, according to Fitch analyst Diana Allmendinger.
The move was triggered by a Bloomberg report saying that the company had been in contact with private equity firms including Blackstone Group LP and Bain Capital to gauge their interest in an LBO.
In such a scenario, the expectation is that the acquirers would ramp up debt to pay for the deal, and likely send CSC’s investment-grade ratings hurtling into “junk” territory.
“After pricing consistently in line with ‘BBB’ levels for the past six months, credit protection on Computer Sciences’ debt is now pricing in below investment grade space,” Allmendinger said.
CSC is rated Baa2 by Moody’s, BBB+ by S&P and BBB by Fitch.
Bank of America said in a research note that the news has not been a total surprise as CSC has traditionally been considered a potential LBO candidate.
“Currently the company scores as a feasible LBO candidate in our own model, with a pro-forma EV of US$10bn,” the note said.
The news also re-priced the tech sector, with most companies in the sector widening about 10bp after news hit the tape.
Computer Sciences Corp did not return calls seeking comment.
The company has a US$2.5bn revolving credit facility maturing in 2019 and approximately US$2.3bn of cash, according to Fitch Ratings.
Fitch said about US$1.1bn of CSC’s cash is held offshore, a portion of which is accessible in a tax-efficient manner through settlement of inter-company loans or return of capital distributions.
Its total debt, according to the ratings agency, was approximately US$2.8bn as of December 2013.
