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Derivatives

GMAC Loans Sale Squashes Protection Price

Credit spreads on General Motors Acceptance Corp, the consumer financing arm of General Motors Corp., pulled in more than 80 basis points last week after it agreed to sell USD55 billion in auto loans to Bank of America.

Credit spreads on General Motors Acceptance Corp, the consumer financing arm of General Motors Corp., pulled in more than 80 basis points last week after it agreed to sell USD55 billion in auto loans to Bank of America. Traders said the news points toward financial recovery by the company and dealers reacted positively by selling protection on the name.

Five-year credit-default swap spreads tightened to 368 bps on Wednesday from 455 bps the week before. One month ago spreads stood at 511 bps. "There was a huge rally on GMAC on the back of better sentiment," said one trader. Market officials reported CDS activity was driven by U.S. hedge funds and proprietary desks short covering their positions on GMAC. "There is no real money involved," said a trader, who also noted the bid/offer spread on the company still sits wide.

One trader also said positive market sentiment stemmed from speculation United Auto Workers, a union which represents many GM employees, is close to an agreement on healthcare costs. "People think GMAC is addressing the problems it has and is being aggressive in solving them," he said. Traders predicted spreads on GMAC will continue to tighten because it is soon to issue EUR300 million in 18-year bonds. "The market will certainly drift tighter," one trader noted.

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GMAC is rated BB plus by Fitch Ratings and BB by Standard & Poor's. Both have the company on a negative outlook and Moody's Investors Service, which gives the company a Baa2 rating, has it on watch for possible downgrade.

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