Spreads widened on auto parts supplier Delphi Corp. last week as protection was snapped up after General Motors Corp., a major Delphi client, released poor second-quarter financial results. The five-year credit-default swap spread on Delphi widened by 50 basis points, moving out to 750-760bps from 700-710bps the week before, one trader said, adding he does not expect it to move out much further. By Wednesday's end, Delphi spread had narrowed back to 730bps. The trader explained GM is so closely connected to the auto supplier, that Delphi spreads move in tandem with GM.
Standard & Poor's downgraded Delphi to B plus from BB in May, and in a report analyst Martin King attributed the negative outlook, in part, to slowed vehicle production at GM, its former parent company, which accounts for almost 50% of Delphi sales. The report said Delphi ratings could be lowered at any time if industry conditions deteriorate, particularly if the outlook for GM production worsens.
King said GM's production schedule has improved since the writing of the downgrade report, noting the auto company's strong sales in June are not reflected in second-quarter earnings. "There are reasons to be hopeful," he said.
