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Auto Downgrades Could Boost High-Yield Sales, Trading

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Standard & Poor's downgrade of General Motors and Ford Motor Co. could actually cause the high-yield new issue calendar to pick up and spreads on the credits themselves to tighten.

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Standard & Poor's downgrade of General Motors and Ford Motor Co. could actually cause the high-yield new issue calendar to pick up and spreads on the credits themselves to tighten. The counterintuitive byproducts should occur once static from last week's ratings activity subsides, according to some buy- and sell-siders. Some professionals anticipate the downgrades will return investor focus to credit fundamentals, which could prompt trading volumes to increase and spreads to tighten. "Now a buy-side analyst can return to focusing on spreads and prices reflecting fundamentals," noted one portfolio manager.

"With this out of the way, we could see the new issue market reopen," said Kevin Akioka, portfolio manager at Payden & Rygel Investment Management in Los Angeles. At the very least, one high-yield banker said, primary market conditions are unlikely to worsen since the overhang had already resulted in investors demanding hefty premiums on risky deals. "The market wasn't frozen, but it's been choppy for sure. We could start to see some stability once it's fully priced in," he commented.

The downgrades were expected sometime this year because the issuers had been on CreditWatch since March, but the timing of them caught many market participants off guard, leading them to say it could put some juice back into the high-yield arena.

Furthermore, the effect of on spreads was muted by the sharp rally just a day before after word spread vulture investor Kirk Kerkorian had increased his ownership stake in GM. Overall, GM's 8 3/8s of '33 rose about three points on Wednesday to 79 cents on the dollar on the Kerkorian news; the post-downgrade fall on Thursday merely reversed this rise.

To be sure, many market participants still are ambivalent and don't see spreads moving tighter. And there's concern Moody's Investors Service will soon follow suit and slash the automakers' ratings to junk. "There is no bid for risky assets...and nobody's missing the new issues except for the bankers," said one bearish high-yield investor.

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