Five-year protection in the auto sector widened by roughly 20 basis points across the board last week as a host of negative credit, earnings and technical issues led to higher protection costs. DaimlerChrysler widened from 175bps at the start of the week to 195bps by Thursday, despite the lack of any company-specific news.
The move came after Standard & Poor's downgraded Ford Motor Credit and General Motors Acceptance Corp. two notches to BBB plus and Ford's announcement of a USD502 million third-quarter operating loss on Wednesday. Furthermore, Ford is planning to raise a minimum of USD3 billion on the international debt markets despite the downgrade. "Autos are widening because of the increased supply, the bad earnings and the downgrades," summed up one trader. He and others said DaimlerChrysler's A3/A- rating is likely to be lowered at least to par with Ford and GMAC. Five-year protection on other European carmakers, such as Fiat and Volvo, also widened about 20bps. Fiat was quoted at 170-185bps and Volvo at 135-150bps on Thursday.
"[DaimlerChrysler] will get downgraded--it's a matter of when rather than if it will happen," said Nesche Yazgan, transportation analyst at Deutsche Bank in London. She said the downgrade is likely to come around the release of third-quarter earnings, which were scheduled to be released after DW went to press on Friday. "They will definitely not surprise on the upside," she said.
Auto Sector Five-Year Credit Protection
Source: J.P. Morgan Chase Charisma@chase.com