The battle for the shopping dollars of Australians buffeted by a slowing economy is pushing up bond risk for Woolworths, the nation’s biggest supermarket chain.
The cost of protecting bonds issued by Woolworths using credit-default swaps climbed to 65.3 basis points on 31 March, the highest level since November 2013. In March, Woolworths CDS rose above contracts for Wesfarmers, owner of the second-largest supermarket chain, Coles, for the first time in approximately ten months and reached the highest level on a relative basis since 2011, according to CMA pricing.
Woolworths is struggling as competition ramps up from Coles and German discount rival Aldi, with the 90-year-old Sydney-based retailer cutting earnings projections. Consumer confidence is wilting as unemployment increases amid a collapse in prices for key exports, such as iron ore.
Traders expect the Reserve Bank of Australia to cut its overnight cash target to a record 2 per cent.
“There’s been some bearishness around Woolworths [after it reported a decline in profits in the second half of 2014],” said Anthony Ip, a credit-sector specialist at Citigroup Inc. in Sydney. “Investors are worried about competition, not just from Wesfarmers, but also from foreign entrants such as Aldi.”
News by Bloomberg, edited by ESM