Credit-default swap spreads on Fiat and General Motors Acceptance Corp tightened last Monday after General Motors agreed to pay EUR1.55 billion to unwind the Italian car maker's option to sell Fiat to GM.
Fiat pulled in 35 basis points to 325bps and GMAC tightened just four basis points to 233bps. Spreads on Fiat, however, then widened to 335bps last Wednesday, while GMAC tightened further to 231bps on the same day. Traders explained the Fiat move was driven by a general widening of names in the iTraxx Crossover index.
Dealers reported most players selling protection on the pair and particularly on Fiat. "We believe that in such a strong market Fiat should trade tighter," said a credit derivatives marketer at a German house. He explained a popular way of taking this view was to execute zero-premium put strategies on the downside of either the crossover or the high-vol indices.
Both Moody's Investors Service and Standard & Poor's rate Fiat just below investment grade at Ba3 and BB minus, respectively, and assign GMAC ratings of Baa1 and BBB minus, just within investment grade. Nicholas Baudouin, analyst at S&P in Paris, said the resolution of the dispute would not affect Fiat's rating, but added, "At least now we have some clarity." He noted the avoidance of a legal dispute is positive for Fiat.
