In response to a General Motors Acceptance Corp. new issue GMAC's spread widened to 285 basis points from 185bps over one week. The spread between Ford Motor Credit and GMAC widened to 22bps from 12bps over the past 10 days.
Market participants are trading GMAC, the finance arm of General Motors Corp., on both the cash and credit-default swap side based on flows they're seeing surrounding the bond deal, which matures in 2014 and offers a yield of about 6.75%. The bond deal came extremely cheap to the rest of the curve, which resulted in a lot of relative value trading in both cash and default swaps, a trader said. Everyone is involved, he added, naming hedge funds, insurance companies and banks among the active traders.
Jim Kenny, senior managing director and head of credit default swap flow trading at Bear Stearns in New York, said, "The GMAC bond deal, the Thanksgiving holiday and the fiscal year-end for a few major dealers have helped to push the GMAC spread out 20bps over the past week. I believe after Dec. 1, with supply behind us and the fiscal year-end behind us, GMAC spreads could do better."
Moody's Investors Service lowered GMAC's rating on Nov. 4 to Baa1, while Standard & Poor's has it at BBB minus. Mark Wasden, senior analyst at Moody's in New York, said GMAC's downgrade followed the rating's drop of its parent company. The two moved in tandem due to business connections, he said, citing GM's drop in volume of originations, the size of its portfolio and value in terms of residual realization as major factors. He also noted GMAC has a one notch differential with its parent company, rated Baa2, because GMAC has a more resilient earnings base and liquidity levels than GM and its unsecured creditors would fair better in a stress scenario. "We expect its earnings to continue and we expect it to maintain strong liquidity," Wasden said. "And we think the company has proven itself to be a solid underwriter of credit risk."
