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Credit investors on Friday continued to bet large sums of money that General Motors will restore its GMAC finance arm to investment-grade status by selling a controlling stake to a big financial company with strong credit.
Credit spreads on the General Motors Acceptance Corp have moved steadily tighter since GM said on Monday it may sell the stake.
Besides selling automotive financing, GMAC provides commercial finance, insurance and mortgage products as well as real estate services. Analysts say a majority stake in GMAC could cost between $10 billion and $15 billion.
GMAC spreads tightened significantly in a relatively short period of time. But by Friday, some analysts said that perhaps GMAC spreads had moved too tight given a deal has not been announced yet and any tentative deal will carry execution risk.
"I am astounded with what's gone on here," said John Atkins, corporate bond analyst at economic research group IDEAglobal in New York. "The rally began with short-covering and now appears to be pure speculation."
Five-year protection on GMAC debt was quoted at 215 basis points on Friday, from 275 basis points on Thursday and 490 basis points at the close of trading last week.
Credit investors en mass are apparently betting that GMAC can quickly become at least a solid triple-B credit and perhaps go as high as double-A, depending on which big financial company buys it, analysts said. Spreads on GMAC's cash bonds also tightened in very heavy trading on Friday.
An analyst at a mutual fund company in the Midwest cautioned against following GMAC any tighter because the easy money has likely been made on this trade and its spreads could blow back out if GM announces a deal that fails to accomplish what investors expect.
He said investors would be disappointed if GM attempted to sell the GMAC stake with a provision to buy it back in the future. That would likely mean that GM would get less money for the GMAC stake and would detract from the potential credit quality of GMAC, the analyst said.
GM officials were not immediately available for comment. Analysts did not rule out GMAC spreads tightening further next week.
Spreads could approach the 150 basis point neighbourhood if GMAC is definitely seen becoming a solid triple-B credit and could head toward 100 basis points if it is seen going up to double-A status, an analyst said.

Copyright Reuters, 2005

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