Credit traders were scrambling to buy protection on Delphi Corp. last week after a slew of negative announcements started rumors the Troy, Mich.-based auto part maker might file for bankruptcy. Five-year credit default swap spreads on Delphi moved to about 385 basis points from the 270-280bps range a week before.
Another trader explained spread widening was driven by a March 1 announcement that an internal audit found accounting irregularities in the company's books, leading Delphi's board to pressure its cfo to step down. A week later, Delphi told employees it was going to stop paying medical insurance in 2007 for 4,000 retired salaried workers and many more future retirees, which would save the company millions of dollars. This led market players to speculate Delphi might file for bankruptcy so that it could turn its pension plan over to the Pension Benefit Guaranty Corp., which would cover most of the company's pension plan costs. All this drove traders to buy protection and caused Delphi's stock price to plummet. The company's stock hit an all-time low on Wednesday of USD4.84 per share, down from USD6.83 a week before. At the turn of the year, Delphi stock was trading at about USD9 per share.
In response to these events, Moody's Investors Service announced it did not regard Delphi worthy of an investment grade rating. On Tuesday, Moody's downgraded the company to junk status, lowering it to Ba2 from Baa3. Standard & Poor's rates it a BB plus and put it on negative watch after news of the accounting irregularities broke.
