LBO repricing is overdone, says Barcap

Barclays Capital says the recent repricing of LBO candidate credits seems overdone. In its latest US Credit Alpha report, the bank picks out 15 US investment grade credits that have widened 25% compared to the CDX in the past four weeks. It says that for most of these names, such as Computer Sciences (35 basis points wider at 47bp), Pitney Bowes (up 39bp at 112bp), US Cellular (up 30bp at 90bp), Eastman Chemical (up 21bp at 69bp) and Waste Management (up 28bp at 95bp), the widening is mainly due to event risk fears.

In effect, says the report, these names have repriced by the equivalent two to three rating notches. However, historically, actual LBOs in the latter stages of the cycled resulted in a widening equivalent to only a one or two notch downgrade, according to Barclays Capital’s calculation.

Barclays says that one of the most attractive opportunities to play credit from the long side in coming months will be to “fade the LBO hype” and sell short-dated protection where LBO-inspired widening is overdone.