GM Protection Widens After Delphi Filing

Credit protection on General Motors Corp. widened dramatically last week in response to Delphi Corp.'s Chapter 11 filing for bankruptcy protection. Five-year credit-default swap spreads on GM widened to 970 basis points on Wednesday from about 770 bps just before the filing, on fears that Delphi, GM's biggest supplier, would demand price relief or cancel contracts.

Protection buying swelled because GM is such a popular, heavily referenced entity. "GM's in everything," said one trader. "And it doesn't help that it's going to report earnings Monday." He noted, though, that spreads tightened somewhat Wednesday afternoon on positive comments from Steve Miller, Delphi ceo CEO, who said he would not ask for price increases and believed a strike was unlikely.

Fitch Ratings lowered GM to BB- from BB Oct. 5, and placed it on credit watch negative, citing added pressure from legacy costs of Delphi's 1999 spinoff and erosion of its own North American market share. Standard & Poor's followed suit Oct. 10, with the same downgrade and outlook. The same day, Moody's Investors Service placed GM's Ba2 senior unsecured rating under review for a possible downgrade. In order to preserve this rating, Moody's analysts said GM will have to "successfully address a number of increasingly burdensome challenges," such as achieving meaningful reductions in cost structure, reducing employment levels and production capacity and reducing its dependence on price incentives "to prop up its sagging market share position in the U.S."