Credit-default swap spreads on DaimlerChrysler blew out last week after news hit the market late Tuesday that the U.S. arm would suffer a second-quarter loss of USD1 billion. Although the Chrysler Group said it planned to cut a further USD1 billion of costs to allow it to report an operating profit for the year, bond investors were upset that this information was not disclosed before a USD2.5 billion bond issue was marketed, traders said. As a result, the bond deal was relaunched and is expected to price with a higher coupon.
Reaction to this news sent spreads motoring to 125 basis points for mid-market five-year protection from 105bps/110bps on Tuesday. Volumes increased by three or four times on Wednesday, traders said, adding that about USD100 million of trades were executed making it the most actively traded name. One trader said he was surprised that spreads did not blow out further on the negative news, but another countered that a 20 basis point move was significant.
The news resulted in Moody's Investors Service putting DaimlerChrysler's long-term debt ratings on review for possible downgrade. "What we have said is that [the profit warning] will be part of our review process," said Falk Fry, senior analyst in Frankfurt. Fry added that the rating agency will focus on the impact of price competition in the U.S. automotive markets on Chrysler's financial performance, as well as management's capacity to respond to these pressures to limit the effect on DaimlerChrysler's cash generation abilities. Standard & Poor's lowered DaimlerChrysler's BBB plus rating to outlook negative, from credit watch negative.
Five-Year Credit Protectio On DaimlerChrysler
