Debt Markets Aren’t Only Worried About HP, but Dell and Others, Too
Last week I wandered a bit into the financial weeds to take notice of the fact that someone appears to be getting nervous about Hewlett-Packard and the prospects of its ability to make good on its long-term debts.
What tipped me off is the price of an obscure financial instrument known as a credit default swap. You may remember them from such hits as the great mortgage meltdown of 2008. While these credit default swaps have no connection whatsoever to mortgages, they do the same thing as the swaps did in that case: They serve as insurance.
When a lender worries about the likelihood that he’s going to get repaid, he can buy insurance against the chance that the borrower defaults. That’s essentially what a credit default swap is. You buy one, and if the borrower defaults, you get paid. If the borrower doesn’t default, whoever sells the swap pockets the fee, just like an insurance company. It’s a decent business, and there’s a thriving market for credit default swaps on all kinds of debts.
Anyway, last week I pulled some data showing that the price to buy this protection on HP’s debt has gone up — way up — since this time last year. In industry shorthand, the price to buy protection on $10 million worth of HP debt for five years has been “blowing out.” (Hence the movie poster from the forgettable 1981 John Travolta movie.) Protection a year ago that cost $65,000 has gone up to $325,000, while prices on the swaps covering debt on IBM and Oracle have stayed more or less flat.
And while it has no direct bearing on HP’s finances or operations — credit default swaps are derivative instruments — they do serve as an important barometer of the mood of bond markets that trade in debt. If the price to insure against the possibility of a default, however remote, is rising, the cost to take out new debt by issuing bonds can increase, as can the cost of refinancing existing debt. And when you consider that HP has a net debt burden of about $21 billion, a small increase in the costs associated with financing it can have a direct effect on operations.
Apparently I was on to something. It turns out that the “blow out” isn’t just happening to HP’s debt, but to debts held by Dell, Xerox and Lexmark, too. Today, The Wall Street Journal’s Rolfe Winkler looked at all three and saw similar pricing trends. The most extreme case was at printer maker Lexmark, where the cost of swaps on its debt have tripled to $590,000.
At a moment when other once-solid tech companies like Nokia and Eastman Kodak are in distress, more people are betting on — or insuring against — the possibility that HP, Dell, Xerox and Lexmark end up like them.
