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Derivatives

Ford & GMAC Widen On Downgrade Fears

Five-year credit default swap spreads on Ford Motor Credit and General Motors Acceptance Corp. widened 20-25 basis points on the back of GMAC's USD6 billion global notes offering last week and growing uneasiness over both auto makers being put on negative credit watch in mid-August by Fitch and Standard and Poor's. A New-York based trader reported that credit default swap spreads on GMAC had widened to about 93bps Thursday from about 64bps two weeks ago.

Meanwhile Ford's credit default swap spreads widened to 98-100bps Thursday from about 69bps a month ago. Traders said since the negative credit watches were issued last month, Ford and GMAC have seen their spreads steadily widen. That coupled with GMAC's jumbo bond issue resulted in the 20-25bps jump following the Labor Day slowdown. The fear of a downgrade on the companies has also affected other auto makers, which have widened by about 10bps over the last month. Traders contend, however, that the auto sector will see a leveling off in spreads as summer comes to a close and uncertainty over Ford and GMAC's downgrades are factored into the market. The major players were hedge funds and top-tier investment banks.

Scott Sprinzen, an investment grade corporate analyst covering both GMAC and Ford at S&P in New York, said the rating agency is actively reviewing the ratings of both companies and expects to downgrade by the end of October. He added that the downgrade would bring each companies' long-term credit rating down at least one notch. "We see an A minus as a possible outcome of the review," Sprinzen said. Both companies currently have a single A rating.

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