BNP recommends selling Smurfit protection following Q2 results

In today’s Credit Objective research piece, BNP Paribas analysts say they maintain their recommendation to sell protection on Smurfit Kappa’s (MDPAC’s) senior and subordinated credit default swaps following the company’s release of better-than-expected second quarter results.

In the research, BNP notes that while MDPAC’s senior and subordinated five-year CDS spreads closed on Friday at 500bp and 750bp respectively, they both tightened this morning following the earnings release (with subordinated CDS at 725bp). As of last Friday’s close, Smurfit Kappa’s senior CDS had performed in line with the iTraxx Crossover index year-to-date (both widened by approximately 250bp since the start of this year), whereas the subordinated CDS had underperformed the index by over 50bp during the same period.

BNP’s analysts take the view that the performance of MDPAC’s senior and
subordinated CDS will lag that of the iTraxx Crossover index during the next few months, given their negative outlook for the paper and packaging sector in general. However, they expect that Smurfit Kappa will continue to outperform its industry comparables (such as Stora Enso and UPM-Kymmene) from an operational point of view. They have a Reduce recommendation for both Stora Enso and UPM-Kymenne.

BNP says that, concurrently, it maintains a reduce recommendation for Smurfit Kappa’s euro-denominated 7.75% senior subordinated notes due 2015. The analysts note that at the present levels there is still scope for the spread differential between the corresponding CDS and the bonds to tighten going forward, following the reduction in the basis during the last three months. BNP also does not expect that Smurfit Kappa’s leverage will change materially during the next six months, barring a large acquisition.