Credit-default swap spreads on Fiat widened approximately 80 basis points in the beginning of the week for both five-year and two-and-a-half year protection after the Italian car manufacturer posted a larger than expected net loss for the first quarter on Monday. Swap spreads were trading at 450bps/480bps for five-year protection and 480bps/530bps for two-and-a-half year protection by last Wednesday. Traders said convertible arbitrage funds were big buyers of protection in the two-and-a-half-year portion of the curve to match Fiat's outstanding convertible offering. One trader estimated EUR50-100 million (USD 4.5-9.13 million) traded from Monday to Wednesday. Typically volumes would be in the low end of that range.
"The big concern is whether the company gets downgraded to below investment grade," said Juan Carrion, fixed-income analyst at Barclays Capital in London. Moody's Investors Service rates Fiat Baa2 and Standard & Poor's rates it at A3, both have Fiat on negative watch. Carrion said the company is doing everything it can to increase investor confidence and there are rumors in the market of a possible cash infusion from General Motors. If Fiat did get a cash injection it would probably ward off a downgrade, according to Carrion.
If Fiat does get downgraded to junk status, credit-default spreads would probably widen more, despite the fact that the credit is already trading as if it were non investment-grade, Carrion said.
