Five-year credit-default swap spreads on Goodyear Tire & Rubber Co. and Cooper Tire & Rubber Co. blew out last week after rival tire maker Bridgestone Tire issued lower-than-expected guidance ahead of second-quarter earnings. Hedge funds in particular were buying protection last week to hedge bond holdings, the value of which was being hit as mutual funds and other real money cash holders unloaded positions.
Goodyear's five-year CDS traded at 490 basis points Wednesday from 370 June 11, while Cooper five-year spreads were at 430 bps Wednesday from 290 two weeks ago. Traders said the sector repricing was dramatic but appropriate. "Spreads have been going wider, wider, wider, wider, wider," said one New York trader Wednesday. "But today they found some floor and seem to be stable." The levels make sense given the rest of the high-yield market, he added. "If the rest of the high-yield market was in better shape, it might not have been so extreme."
Ed Weist, an auto analyst at Moody's Investors Service in New York, said cost increases and softening U.S. demand contributed to poor industry volumes in the first-quarter and that both companies face increasingly competitive market conditions. The companies are also trying to counter rising raw material and energy costs, noted analysts. Moody's and Standard & Poor's, respectively, rate Goodyear B3 and B plus with stable outlooks and Cooper Ba3 and BB with negative outlooks.
