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Derivatives

Fiat Spreads Widen After Moody's Downgrade

Credit-default swap spreads on Fiat widened from 585 basis points to 625-640bps last week after Moody's Investors Service downgraded the corporate to Ba3 from Ba1 on Monday. Most of the trading actively was executed by hedge funds with only a few asset managers entering the market to hedge their bond positions. Fiat's downgrade did not affect the rest of the auto sector because it is the only major

high-yield auto producer. In fact, investment-grade auto stocks generally tightened. For example, credit protection on DaimlerChrysler came in to 125-128bps from 132bps.

Moody's downgraded Fiat because of liquidity concerns. It needs to successfully complete several asset sales and raise financing to fund itself through to March next year, according to a written statement by the rating agency.

Michie Yana, senior credit analyst at Commerzbank Securities in London, said: "There remains concern about Fiat's liquidity which will be watched on a quarter-by-quarter basis." She added there will be little liquidity left for next year and the year after once the auto manufacturer has finished its planned disposal of around EUR7 billion (USD7.94 billion) of assets.

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