American credit market outlook

Credit investors were surprisingly unworried about Maytag's leveraged buyout on Friday, but the company's performance in the credit markets could suffer in the coming weeks, traders said. Maytag Corp said on Thursday it was selling itself to investors led by private equity firm Ripplewood Holdings LLC for $1.125 billion. The group will assume $975 million of debt. Leveraged buyouts would usually punish a company's bonds, but Maytag's bonds and credit derivatives did just fine on Friday. "The hope is, the group of investors will more aggressively take the necessary steps to make the changes at Maytag necessary to keep them competitive," said Matthew Lawson, consumer products credit analyst at 4086 Advisors in Carmel, Indiana.
Those operational improvements could help offset the fact that the company's borrowings will likely rise, Lawson said. Profit-taking on short positions also helped prevent the company's bonds and credit derivatives from weakening on Friday.
The cost of protecting the company's debt against default for five years was unchanged at 432 basis points, or $432,000 a year for every $10 million of principal protected.
But even if Maytag rights itself in the long term, in the near term the credit could weaken in the markets, said two traders who were sort the credit. A spokesman for Maytag declined to comment.
The company will likely boost its debt load as part of the leveraged buyout, but with the junk market weak, borrowing could be expensive, a trader said. Paying high rates for new debt would likely weaken the company's existing debt.
There are many unknowns concerning the take-over, including how much new debt the company is set to take on. Any bad surprises in an already weak junk bond market will likely hit Maytag, traders said.
And it is still not clear whether Maytag will be able to right itself long term. The company is struggling with higher steel prices, high labour costs, an underfunded pension plan and increasingly fierce competition from overseas manufacturers.
Last week, Maytag halved its quarterly dividend after posting an 80 percent drop in first-quarter profit in April and said it was looking to restructure its manufacturing operations and change the terms for its financing.
All three agencies said on Friday that they may cut Maytag's debt ratings deeper into junk status.