Dealers are fearful of a slew of downgrades for CDOs that reference Delphi Corp. and there's concern this could lead buy-and-hold investors to unwind or restructure investments. The structured credit market has only been slowly recovering since it was rocked last May by a first round of downgrades in the auto sector. Now it's expecting more turbulence from General Motors Corp., the onetime Delphi parent that may be on the hook for pension liabilities, and auto-parts supplier Dana Corp. is also struggling.
There is a groundswell of concern about Delphi's knock-on effect on CDO ratings, but calm in the single-name market, which had largely priced in the risk of default, is staving off wholesale chaos. "We've had clients calling to check subordination levels," said one structurer at a U.S. house. "But to call it panic would be an exaggeration." Most structurers noted it is early days and hard to predict how many deals will have to be restructured or unwound until the rating agencies announce the downgrades.
Fitch Ratings announced Thursday it has 40 tranches from 15 global public CDOs, and 33 tranches from 25 private CDOs on rating watch negative as a result of Delphi's Chapter 11 filing. Fitch noted the transactions have a total exposure of EUR1.27 billion to Delphi. Dealers said the news from Fitch was on the whole better than expected, but they were waiting to see numbers from other rating agencies. Standard & Poor's estimated approximately 35% of rated synthetic CDOs have exposure to Delphi. Moody's Investors Service said it expects to downgrade around one-third of all CDOs which reference Delphi.
Lorenzo Isla, head of European structured credit strategy at Barclays Capital in London, said Delphi's downgrade could have a much more limited effect on the structured credit market than had been feared at the start of last week. In a research report last week, strategists at the U.K. house predicted more CDOs are likely to be restructured than unwound altogether. But Isla noted much depends now on whether Dana files and whether GM is downgraded.
