Credit-default swap spreads on Delphi Corp. bounced around this week in response to continued speculation the company is set to file for bankruptcy. Spreads on five-year CDS were trading at about 1,500 basis points at the start of last week, with hedge funds and other CDS players active in both buying and selling protection on the corporate. One trader said it was by far the most actively traded name last week.
Traders explained the volatility of credit protection reflects ongoing negotiations with trade unions and General Motors Corp., Delphi's former parent and biggest customer. Edwin Wiest, analyst at Moody's Investors Service in New York, said Delphi is trying to shed legacy costs and improve its North American cost structure through negotiations, but he noted bankruptcy is still a possibility. Delphi has posted losses over the last year, due to both restrictive union agreements and an uncompetitive cost structure in the U.S. Wiest noted one silver lining is its continued profitability abroad.
Both Fitch Ratings and Moody's downgraded Delphi Aug. 5--Fitch to CCC from B, Moody's to Caa1 from B2--and keep the company on rating watch. "It could go bankrupt in the next month or hang on for a year," said a credit derivatives trader. "Either way, it's tenuous," he added. The uncertainty will likely trigger further spread volatility, agreed another official.
