Mugged

28 May 2004

As Philip Green s bid for M&S shows, onetime investmentgrade bondholders risk being subordinated to new highyield debt structures. The problem is inadequate covenants. Bondholders should negotiate better ones. A bid as big as Green s may spur them into action.

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The cost of insuring Marks & Spencer debt against default has surged after Philip Green said he was preparing a possible offer for the UK retailer.

In early dealings in the credit derivatives market on Friday, the cost of insuring the debt against default for five years rose to 2.35% of the amount insured per year. The cost was as low as 0.6% early on Thursday, before news of the possible bid leaked.

M&S's credit ratings are currently in the middle of the investmentgrade spectrum. Moody's rates the group A3 with a stable outlook. Standard and Poor's rates it singleA with a negative outlook.

Depending upon the outcome of any leveraged buyout of the company, and its financing structure, M&S's credit rating could potentially fall to junk.

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