The U.S. credit derivatives market was all but paralyzed last week as credit derivatives professionals waited on the outcome of a review by Standard & Poor's into its rating on Ford Motor Credit. While it is generally accepted that Ford will be downgraded to BBB minus, from BBB on CreditWatch negative, what is less predictable is whether the auto giant will gain a stable outlook or continue to be on negative watch, said traders. Keeping the firm on negative watch in addition to any downgrade would put Ford en route to junk status and the effect of this would bleed across all credits, they said.
S&P placed Ford on CreditWatch with negative implications on Oct. 21. Scott Sprinzen, analyst at S&P in New York, said it will decide whether to lower Ford's rating and the rating outlook before Nov. 18. He declined further comment.
Five-year credit protection on Ford blew out 90 basis points to 280bps immediately following the announcement, a huge move for such a large credit, said one trader. Last Wednesday default swaps on the name had come back in to around 250bps, showing that traders are divided on what S&P will ultimately decide.
If Ford is downgraded with a stable outlook the name would likely see minor spread tightening, however, if it is downgraded with a negative outlook the whole market will see violent spread blow outs, said one trader. He predicted that the worst case scenario could see spreads on Ford explode by as much as 300bps. In the wider market, meanwhile, CDS indices such as TRAC-X and iBoxx, could move by over 10%, he said.
