Hedge Fund Enters Credit-Default Swap On Auto Supply Maker

GLOBALCAPITAL INTERNATIONAL LIMITED, a company

incorporated in England and Wales (company number 15236213),

having its registered office at 4 Bouverie Street, London, UK, EC4Y 8AX

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement | Event Participant Terms & Conditions

Hedge Fund Enters Credit-Default Swap On Auto Supply Maker

Bond Street Capital, an Englewood Cliffs, N.J.-based hedge fund specializing in managing distressed debt portfolios, recently bought five-year credit protection on auto equipment supplier BorgWarner. Sam Kim, a senior analyst at the hedge fund, said he made the trade because he believes the current auto slowdown in the U.S. is likely to be a long-term situation and auto suppliers, such as BorgWarner, are likely to lose their investment-grade rating. Another reason for the trade hinges on Kim's expectation that BorgWarner's credit is trading much tighter than it should be in light of continued widening of auto names.

The swap was priced at 145 basis points, said Kim. He expects the credit-default swap spread on the Chicago-based equipment maker to widen in conjunction with widening spreads on big auto-makers, such as General Motors Acceptance Corp., as investors look to buy protection in the wake of the pending slow down. Kim declined to predict what BorgWarner will widen to, but predicted the spread would continue to widen until year-end. He added that analysts are forecasting auto supplies production to decline from current estimates of about 15 million product units annually to about 14 million. "In reality, I think that is still somewhat optimistic. This company is going to come under a lot of pressure on a unit basis and pricing basis and face dramatic declines," Kim noted.

The counterparty to the deal was Merrill Lynch. Kim said Bond Street works exclusively with Merrill Lynch and J.P. Morgan. The notional size was USD5 million. A spokesman at Merrill Lynch did not return calls.

Related articles

Gift this article