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Derivatives

Fiat Spreads Widen On Convertible Offering

Five-year protection on Italian carmaker Fiat widened by about 30 basis points last week on the back of the company's USD2.2 billion convertible bond offering, as convertible arbitrage hedge funds flocked to the credit-default swap market to strip out credit risk. Fiat spreads widened to 160bps Wednesday from 130bps at the start of the week. One trader noted the spreads temporarily tightened Wednesday morning in London to 140bps, only to widen Wednesday afternoon when U.S.-based hedge funds sought protection as part of the convertible deal. "The convertible players are looking to hedge the convertible with credit-default swaps to arbitrage out the equity option," said one trader in London, adding the spreads widened back out again in the afternoon in London when the U.S. market was open. "They are more powerful than the European hedge funds," he noted.

Juan Carrion, an auto analyst at Barclays Capital in London, said Fiat is one of the weakest European auto manufacturers. "From the credit side, things are bad and they are getting worse--they have overcapacity and have had trouble with their product line and market share," he said. In addition to the convertible, the company announced a EUR1 billion (USD890 billion) capital increase last week that led to a nearly 7% drop in its shares. Moody's Investors Service rates Fiat Baa2, while Standard & Poor's gives it an A3 short-term rating.

Five-Year Credit Protection On Fiat

Source: J.P. Morgan

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