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Derivatives

Weak Earnings Drive Auto Spreads Wider

Five-year credit default protection on auto makers spun out last week with one of the biggest moves coming from DaimlerChrysler after the corporate posted weaker than expected earnings on Tuesday. The German giant traded 30 basis points wider on the week, blowing out to 130bps last Wednesday, said a New York-based trader. Widening on the name was further provoked by Standard & Poor's slashing its rating on the firm to BBB, from BBB plus, and assigning it a negative outlook, he said. Ford Motor Credit, meanwhile, continued its volatile ride with protection on the name blowing out to 270bps, from 210bps the previous week. This is a huge move for a credit as large as Ford, the trader added.

Much of the trading volume came from speculative players, including hedge funds, which were both buying and selling protection, said the trader. It was unclear why DaimlerChrysler was trading so much tighter than other autos, although this was largely put down to technical factors holding the name in, he said. A compression trend, which either sees DaimlerChrysler widen or names including Ford move in, is likely in the coming weeks, he predicted.

S&P placed Ford and its subsidiaries on CreditWatch last Tuesday. Scott Sprinzen, analyst in New York, said the negative outlook reflects concerns over Ford's ability to achieve overall satisfactory financial performance, particularly noting the corporate's lack of success in turning around its European operations. In spite of these concerns the ratings agency does not expect to downgrade Ford.

Five-Year Protection On DaimlerChrysler

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