Five-year credit-default swap spreads on General Motors Corp. started trading upfront last week on continued problems for the car maker, including eroding market share.
"There is a point where it trades wide enough that it's a cleaner trade to have points upfront," explained one trader. "That way, you're buying something closer to where the bonds are trading than to par." The price of protection on GM traded Wednesday at a spread of 19 basis points upfront plus 500bps running. As the credit deteriorates, traders said, the points upfront will go higher. General Motors Acceptance Corp. also widened about 60-70 bps this week, trading at 450bps Wednesday morning and going wider.
Traders were split on the potential for a GM default. One said it was reasonably likely and was causing a meltdown in the credit. "Some people think it's overshot, that it's trading too wide," he said. Another trader said there was less worry about imminent default, but that he was seeing interest in shorter-dated protection. "This is significant," the trader said. "It's a different mentality and not a great sign for the credit itself."
Fitch Ratings downgraded GM Nov. 9 to B plus from BB, and placed it on rating watch negative. Moody's Investors Service lowered its GM rating Nov. 1 two notches to B1 from Ba2 with negative outlook. Standard & Poor's lowered its rating on GM Oct. 10 to BB minus, credit watch negative, from BB.
