The five-year credit-default swap spread between General Motors Corp. and its financing arm, General Motors Acceptance Corp., widened to about 270 basis points Wednesday from 190bps the previous day. The move was triggered by a Fitch Ratings announcement that it may split the automaker's credit ratings, which gave rise to fears of a GM downgrade. Traders snapped up protection on the Detroit-based company, driving GM's spread out to around 915bps Wednesday from about 850bps on Tuesday. "I think GM will get downgraded," said one credit trader, adding banks have been most active in buying protection while hedge funds appear to be waiting on the sidelines. Fitch rates GM at BBB minus.
"Anytime you have a significant issuer or reference entity in the market downgraded to junk, you have to contend with forced selling," said one credit analyst. The question is, "To what extent would we see forced selling?" the analyst asked, adding estimates clearly show it would be a small minority of holders and probably would not greatly impact the market.
Yet, GM is one of the largest issuers of corporate bonds and GM default swaps are the second most included name in synthetic collateralized debt obligations, according to a recent Fitch case study on the company. Michael Gerity, a senior director with Fitch in New York, said it is analyzing the impact of a rating downgrade on the synthetic CDO market. He added, "Remember, a downgrade is not a default."
