Credit-default swap spreads on Ford Motor Co. recouped some ground Wednesday from a major blowout earlier in the week, following reports its chairman and ceo was talking with Nissan-Renault's ceo about joining forces. Speculation about the alliance prompted a rally in the price of protection as investors looked to cover long bond/short CDS positions. Ford CDS tightened 45 basis points Wednesday, after widening 90 bps Monday and Tuesday.
Five-year Ford CDS had widened steadily from about 650 bps at the start of trading Monday to 745 bps Tuesday, after the company announced steeper-than-expected cuts to its fourth-quarter production plans the previous Friday. Ford revised third-quarter production to down 11% over last year from previous plans to be down 7-8%, and announced a fourth-quarter plan to be down 21%. "We haven't seen production this low at Ford for at least 10 years," said Martin King, analyst at Standard & Poor's in New York, which maintained its B plus rating but put Ford and its related credits on credit watch with negative implications August 18. "It's a very low level."
The news itself triggered a reversal of the auto industry's month-long tightening, and was compounded by correlation desks looking to hedge exposure to auto names. "Ninety bps in two days is a sharp move," said one New York trader Wednesday. "Autos had come in week over week over week. The retracement was particularly pronounced because people were reaching to cover their longs."
Spreads tightened to, seemed to settle at, around 700 bps after the Wall Street Journal reported discussions between Bill Ford, Ford chairman and ceo, and Carlos Ghosn, his Nissan counterpart. King said S&P is not judging those developments.
