What's The Story On Cedit Default Swaps?

[REP013]

So is this just another blip?

Are we really nearing the end of the volatility in the markets and further writedowns?

Dispatches recently eluded to major issues with CDS's and the $trillions involved, is it contained? Is it BS and there is no problem? Are the cracks just starting and leaving fissures big enough for entire towns?

SPRINTS certainly feeling the pinch with a small $29.4 BILLION loss.

The future ain't ORANGE!

Some comments from those that have exposure / knowledge to these would be nice.

Feb. 28 (Bloomberg) -- Sprint Nextel Corp., the third- biggest U.S. wireless carrier, posted a $29.5 billion loss and scrapped its dividend after writing down the value of Nextel Communications Inc. and losing 683,000 customers.

Sprint sank as much as 13 percent in New York trading and its credit-default swaps reached a record after the company reported a fourth-quarter net loss of $10.36 a share. Sales fell 5.7 percent to $9.85 billion, missing analysts' estimates, and the carrier borrowed $2.5 billion under a credit line.

The loss is the fifth-largest among Standard & Poor's 500 Index companies since 1990. Sprint expects 1.2 million contract subscribers to leave this quarter, as many as it lost in all of 2007, amid complaints of dropped calls and poor service. Chief Executive Officer Dan Hesse, who took over in December, said business is worse than he expected and is deteriorating.

``We need an articulated strategy of how he's going to turn around the business,'' said Michael Nelson, an analyst at Stanford Group Co. in New York who had predicted subscriber losses of 400,000 this quarter. He advises holding the shares. ``I don't expect it to be a pretty picture.''

Sprint, based in Overland Park, Kansas, fell to its lowest level since October 2002. The stock dropped 64 cents to $8.31 at 10:50 a.m. on the New York Stock Exchange and earlier reached $7.75, its steepest percentage decline since Jan. 18. The shares had fallen 32 percent this year before today.

Price War

``We will have a difficult 2008 as we turn this ship around,'' Hesse, the 54-year-old who came in when Sprint ousted Gary Forsee, said on a conference call. ``This turnaround will not happen for many quarters.''

Subscriber losses, already the biggest since the Nextel acquisition in 2005, probably won't ease in the second quarter, Sprint said. If it loses an additional 1.2 million customers, the carrier will shed 5.9 percent of its contract subscribers in the first half of this year.

To win back customers, Hesse today announced an unlimited calling plan for $89.99 a month, including text-messaging and walkie-talkie calling in addition to regular phone calls. That steps up a price war that started last week, when bigger rivals AT&T Inc. and Verizon Wireless unveiled $99.99 offerings. Sprint will sell a $99.99 version with Web access, television and music.

``It's a smart, conservative move,'' said James Moorman, an equity analyst at Standard & Poor's in New York who advises holding Sprint shares. ``It's a differentiator.''

Writedown

Sprint wrote down $29.7 billion of the $36 billion purchase of Nextel and related companies. The expenses reduce its goodwill, the premium paid in an acquisition for reputation, customers and other intangible assets.

Leaving out items such as the writedown, profit was 21 cents a share, topping the 18-cent average of estimates compiled by Bloomberg. A year ago, net income was $261 million, or 9 cents.

The $124 billion combination of Time Warner Inc. and America Online Inc. in 2001 caused the company to write down $100 billion in assets after values for Internet companies plunged. Deutsche Telekom AG, Europe's biggest phone company, took 21.4 billion euros of writedowns in 2002 to cut the value of mobile-phone assets. Vivendi SA wrote down the value of entertainment, TV and music units by 18.4 billion euros for 2002.

`Prudent Step'

Sprint borrowed $2.5 billion under a revolving credit line, in part to mitigate financing risk related to $1.25 billion in bonds that mature in November, $400 million in commercial paper and $600 million of bonds that mature in May 2009. Sprint has about $500 million left under the revolving credit line.

While it doesn't have an immediate need for the cash, Sprint said it made the move because of ``current market conditions.'' The carrier, which had paid a 2.5-cent quarterly dividend, had $22.1 billion in total debt at year-end.

``Not knowing what the future holds, we just thought it was a good, prudent step to take this action now,'' Hesse said in an interview.

Sprint's $2 billion of 8.75 percent bonds due in 2032 fell about 12 cents to 82 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 10.9 percent, or 632 basis points more than similar-maturity Treasuries, up from a yield of 9.4 percent and a spread of 475 basis points yesterday, Trace data show. A basis point is 0.01 percentage point.

Risk of Default

Credit-default swaps tied to Sprint's bonds soared to the highest on record, a signal that debt-market investors are growing concerned about the company's ability to repay its debt. The contracts climbed 135 basis points to 509 basis points, according to London-based CMA Datavision.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A drop shows improvement in the perception of credit quality; an increase, the opposite.

Hesse announced plans last month to eliminate 4,000 jobs and close a fifth of Sprint's retail sites. He replaced three top executives, including Chief Financial Officer Paul Saleh, and moved the headquarters to Kansas to save travel costs. Sprint had split its managers between Kansas and Virginia.

Sprint said first-quarter operating income, a measure of profit that leaves out expenses such as interest, will be $1.8 billion to $1.9 billion.

Subscribers on long-term contracts spent $58 a month on their bills last quarter, down from $60 a month last year, as prices fell for voice calls. Churn, the percentage of users who scrapped the service, remained unchanged at 2.3 percent.

San Antonio-based AT&T lured 1.2 million contract customers last quarter with handsets such as Cupertino, California-based Apple Inc.'s iPhone. Verizon Wireless took 1.6 million.

Sprint countered last year with Taoyuan, Taiwan-based High Tech Computer Corp.'s Touch, which features a touch screen similar to the one on the iPhone.

Mmmmm, deflation, inflation or stagflation?

[algobet]

CDSs enables entities to bet on the creditworthiness of companies, mortgages, loans, etc. they can be good - hedge an existing risk, or when speculative potentially bad.

we just need to know whether any entity has been betting without the money in the bank to pay for losses should those bets go against them.

whilst of course just as someone takes a loss someone will take a profit on the contract - the problem only comes when the loser cannot afford to pay.

i realise i havent asnwered your question but just thought id widen the debate........or just ask the same question.......who's making the losses????

[bleakhouse]

These are the 2 key lines:

"Sprint wrote down $29.7 billion of the $36 billion purchase of Nextel and related companies"

"Chief Executive Officer Dan Hesse, who took over in December, said business is worse than he expected and is deteriorating."

New chief....I think they call it 'kitchen sinking'.

http://www.bloomberg.com/apps/news?pid=new...id=aois2fmPxVRw

Telephone-equipment makers, far removed from their heyday during the 1990s Internet bubble, are now racing for the bottom in the world's stock markets. Nortel Networks Corp. is winning.

Nortel, North America's largest manufacturer of phone gear, has fallen 35 percent this year. The slide accelerated yesterday after the Toronto-based company, hurt by falling sales, reported its 10th loss in the last 12 quarters. Of the 180 stocks in the MSCI World Information Technology Index, only one -- Apple Inc., the maker of iPod digital music players -- has done worse.

Alcatel-Lucent, the world's biggest maker of the equipment, has tumbled 53 percent since being created through a merger in December 2006. Earlier this month, the Paris-based company posted its fifth straight quarterly loss.

Siemens AG, which moved a phone-network equipment unit to a joint venture with Nokia Oyj in 2006, has slumped too. The company's shares have lost 15 percent this year. Siemens, based in Munich, yesterday said it would cut 39 percent of its workers at a unit that makes corporate phone gear after failing to find a buyer.

Quite a few playing the 'kitchen-sinking' game.