The price of protection on Ford Co. and General Motors Corp. debt and their financing arms, Ford Motor Credit and General Motors Acceptance Corp., jumped wider last week as bad news rained down. Industrial disputes at suppliers Tower Automotive, Delphi Corp. and Dana Corp. prompted buying protection and Fitch Ratings' decision to downgrade GM to B from B plus added fuel to the buying fire.
Traders reported a general trend to buy five-year protection throughout the week, although they noted good liquidity from sellers as well. By Friday morning as DW went to press, GMAC credit-default protection was being bought at 515 basis points, compared to about 495 bps at the start of the week. Ford was even being quoted upfront by some dealers. A blip in the protection buying trend occurred Thursday morning, however, when apparent structured credit hedging pulled the whole market tighter, with Ford and GM credit-default swaps pulling in 10-20 bps. "I think a lot of people were caught short," said one trader, adding, "No one could have predicted [it would tighten]." The turnaround to selling protection to cover short Ford and GM positions drove tightening in further, he added.
Another strategy was to buy Ford protection and sell GM credit-default swaps to take the view Ford's credit will under perform GM. Traders also reported selling of one-year CDS on both Ford and GM. "There's a view it's overpriced, neither of them has short-term liquidity problems," said one credit flow trader, who noted for both names, the curve has been inverted. But in its downgrade report, Fitch said GM's liquidity is being put under pressure by the continued Delphi dispute and restructuring costs, among other problems.
