Credit protection on Fiat jumped around 20 basis points last Wednesday on the news its ongoing dispute with General Motors has not been resolved. Fiat holds an option to sell Fiat Auto to General Motors, but GM says the option is no longer valid because of restructuring at Fiat. Fiat announced on Wednesday it had been unable to reach an agreement with GM and this triggered credit-default swap spreads on the Italian auto manufacturer to jump to 370 basis points, compared to around 350bps at the start of the week.
The widening of Fiat's CDS was particularly noticeable in a week in which credit-default swaps across the board were tightening. "There's big demand for synthetic credit exposure," said one trader at a German house, who explained hedging and executing of collateralized debt obligations were driving spreads tighter. Fiat's CDS pulled in to 350 bps on Tuesday, because it was caught up in this rally. Traders said the name was not heavily traded, but the move wider on Wednesday was significant when compared to other auto-related credits, including General Motors Acceptance Corp, which tightened last week.
Moody's Investors Service rates Fiat Ba3 and Standard & Poor's has it at BB minus. Both ratings agencies have the Italian auto maker on negative outlook. Wolfgang Wiehe, analyst at Fitch Ratings in London, reaffirmed a BB minus rating for Fiat last Wednesday. "We assigned some value to the put option, but it is not the main driver for the rating," he noted. If there is a legal dispute, however, Wiehe said Fitch will reassess the rating.
