Boston Scientific Corp's credit spreads briefly widened this week as the medical device maker lost ground in a legal battle over possibly faulty implantable heart devices, but now may still be a good time to sell protection on the company's debt.
A federal judge ruled on Tuesday that some product-liability claims against Boston Scientific over implantable heart defibrillators, which regulate abnormal heartbeats, could proceed to trial, rejecting the company's motions to dismiss them. Guidant Corp, which Boston Scientific bought last year, continued to sell heart rhythm-management devices after learning of possible defects, a US District Court judge in Minnesota said in the ruling.
But much of the potential fallout from the case - and even a possible downgrade of the company to junk status by Moody's Investors Service - may already be baked into Boston Scientific's spreads, said analysts at Barclays Capital in New York. "While the credit story is unlikely to improve in the near term, we believe spreads are unlikely to widen substantially," and may actually tighten, Barclays said in a note on Thursday.
The cost to insure Boston Scientific's debt with credit default swaps jumped a few basis points on Wednesday, but fell again, hitting about 72 basis points by Friday, or $72,000 annually to protect $10 million of debt for five years. Aside from Wednesday's hiccup, Boston Scientific's spreads have generally crept tighter in recent weeks, said Stanton Neilson, health care analyst at Barclays Capital.
"The trajectory's obviously worse for the company, but that gets priced in," he said. Boston Scientific's debt protection costs stood at 80 basis points on April 24 and widened to 88 basis points over the following week, Neilson said, but then tightened to 75 basis points at the end of May.