Five-year credit-default swap spreads on Delphi Corp. kept traders busy again last week, widening to 2,425 basis points Tuesday before tightening in to 2,025 bps Wednesday. Easily the most heavily traded name in terms of numbers of contracts, traders said Delphi was also by far the most active in terms of price volatility. CDS on the name were trading at 2535 bps upfront, as market players, mostly hedge funds, both bought and sold protection.
Martin King, analyst at Standard & Poor's in New York, explained the volatility of credit protection prices reflect increased concerns over Delphi's ongoing negotiations with trade unions and General Motors Corp., its former parent and biggest customer. Resolution of these negotiations is necessary to prevent Delphi filing for bankruptcy. "It's in everyone's best interest to prevent bankruptcy," King said. Other manufacturers have set recent precedents for intervening in the labor costs of their suppliers, he noted. But those negotiations went on months rather than weeks and were on a much smaller scale. In Delphi's case, "There is a reasonable chance a deal will not get done," said King. S&P downgraded Delphi Aug. 5 to CCC+ from B+.
While acknowledging nervousness in the market, King thinks the fallout from a bankruptcy would be relatively minor. "I'm not fearful of a major fallout in the industry," he said. Traders said the risk of bankruptcy is already priced in to the credit protection and a Chapter 11 filing from Delphi would not have a dramatic impact on the markets.
