Bear Stearns CDS Soar After S&P Changes Outlook To Neg

NEW YORK(Dow Jones)--The cost of protecting Bear Stearns Cos . (BSC) bonds rosesharply Friday after rating agency Standard & Poor's revised its outlook on thefirm to negative from stable.

Bear's credit default swaps, or CDS, which are privately negotiated contractsthat allow investors to wager on a company's creditworthiness rose to 150/165basis points from 124/129 basis points earlier in the day, according to ScottMacDonald, director of research at Aladdin Capital Management in Stamford, Conn.

This means the cost of protecting a notional $10 million of Bear's bondsagainst a possible default for five years is now between $150,000 and $165,000per year, up from between $124,000 and $129,000.

Risk premiums on Bear Stearns' bonds also rose on Friday. On its 5.550% notesdue 2017, they were 20 basis points wider at 225 basis points on three tradesaccording to MarketAxess, an online trading platform.

S&P also said that it affirmed its A-plus issuer credit rating on Bear as wellas its ratings on various Bear affiliates.

"The negative outlook reflects our concerns about recent developments andtheir potential to hurt Bear Stearns' performance for an extended period," saidDiane Hinton, credit analyst at Standard & Poor's. "We believe Bear Stearns' reputation has suffered from the widely publicized problems of its managed hedgefunds, leaving the company a potential target of litigation from investors whohave suffered substantial losses."

Recently, two hedge funds managed by Bear Stearns nearly collapsed due tolosses in investments in the subprime mortgage sector. Earlier this week, thecompany stopped redemptions in a third hedge fund.

S&P noted in a release that Bear Stearns has "material exposure to holdings ofmortgages and MBS, the valuations of which remain under severe pressure."

The ratings "could be lowered if large losses were to be incurred over thenext few quarters or if earnings failed to stabilize at a satisfactory levelbeyond the next few quarters, which we expect will be - at best - difficult onesfor the company," S&P said.

On the other hand, if Bear Stearns overcomes current challenges, the ratingoutlook could be revised back to stable.

The company was not immediately available for comment.

In other subprime-related news, the CDS of Countrywide Financial Corp. (CFC)rose to 320/350 basis points from 215/235 basis points on Thursday, according toMacDonald of Aladdin Capital Management. On Wednesday, the CDS stood at 167/177basis points.

On Thursday, there was speculation in the market that the mortgage lender'sfinances may be in trouble over subprime home loans. The company issued astatement that afternoon saying it had sufficient funds and that its financialcondition "remains strong."

Last week, the largest U.S. home lender said losses on certain loans to morecreditworthy borrowers contributed to a 33% drop in second-quarter net income inwhat is seen as another sign of spreading credit problems.

-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;anusha.shrivastava@dowjones.com

(END) Dow Jones Newswires 08-03-07 1044ET Copyright (c) 2007 Dow Jones & Company, Inc.