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GM Spreads Tighten, But Questions Remain

31 Mar 2005

Protection on General Motors Acceptance Corp., the financing arm of General Motors Corp., was still in demand last week, but spreads tightened because many investors took a back seat to reassess positions and wait for GM's next earnings report later this month.

Protection on General Motors Acceptance Corp., the financing arm of General Motors Corp., was still in demand last week, but spreads tightened because many investors took a back seat to reassess positions and wait for GM's next earnings report later this month.

Five-year credit-default swap spreads on GMAC tightened to 440 basis points Wednesday from a wide of 525bps the week before. GMAC was trading at 275-280bps in mid-March when GM announced lower-than-expected earnings for the first quarter and calendar-year. This year the Detroit, Mich.-based automaker expects earnings of approximately USD1-2 per share, down from the previous target of USD4-5 per share.

The trader said market participants disagree on what will happen in the coming weeks, with some thinking GMAC's spread will tighten back and others arguing the credit market has suffered from poor performance in the auto sector and, after maintaining a two-year rally, the market has finally let up. Another credit trader said investors are waiting for April earnings figures, noting volatility has eased, ranging around 20bps Wednesday compared to 50-60bps a couple weeks ago. A poor earnings report in April will shake things up again, the trader said, adding it would send GMAC down the ratings scale.

Standard & Poor's placed GMAC on negative outlook and Moody's Investors Service placed it under review for possible downgrade after its poor March figures came out. S&P, which gives GMAC a long-term rating of BBB minus and a short term rating of A minus 3, noted the company's consolidated debt outstanding totaled USD301 billion at the end of the year.

31 Mar 2005