General Motors' profit warning and rating outlook cut to negative hammered its euro bonds on Wednesday, with traders saying a recovery in the debt of the world's top car maker is unlikely in the near future. GM started its Wednesday by saying it expects a first quarter loss of $1.50 per share, wiping out a previous forecast of break even or profit-making. The announcement squashed the spread on its 8.375 percent bond due 2033, 45 basis points wider to 500 basis points more than government debt.
Credit ratings agency Standard & Poor's then cut its credit outlook to negative from stable, setting the stage for a downgrade, which would send GM into sub-investment grade or "junk" status. That could force many holders of its bonds to sell at steep losses.
"People were expecting a cut straight to junk so there was short-covering rally after the S&P cut in the outlook to negative," said a bond trader in London.
The 2033 bond tightened as much as 20 basis points after the S&P comments, but lost ground again and widened out to 490 basis points over government debt, 35 basis points wider on the day.
Christophe Boulanger, an auto credit analyst at Dresdner Kleinwort Wasserstein said he expected Moody's Investors Service and Fitch Ratings to cut their ratings on the company by one notch to the bottom of the triple-B category.
While spreads were weaker across the board on Wednesday, some said that the reaction to the GM news was relatively muted. "The market's had a rough week anyway," said another trader in London. "Credit is taking a breather, and GM has caught the market in a bit of a dip, but I think it's temporary," he said.
However, a widening in spreads is likely to be viewed as an opportunity for investors sitting on cash to step back into the market.
"Given the tight levels that we've seen there are assets that, although they're 5 to 7 percent tighter than the start of the year, now look relatively cheap," he said.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 43.1 basis points more than similarly dated government bonds at 1609 GMT, 2.6 basis points more on the day.
Heavily indebted Nordic bus company Concordia Bus AB said on Wednesday it had agreed the terms of a financial restructuring with its subordinated bondholders that will hand them effective ownership of the company. After the debt for equity swap, Concordia's current owners, Goldman Sachs Capital Partners III, L.P. and the Schoyen Gruppen AS, will own the 4 percent of the company not held by the subordinated bondholders.
Concordia, which runs bus services in Sweden through its Swebus unit and in Norway and Finland, was forced to restructure debt after missing an interest payment on the notes on February 15, as high debt levels and problems renegotiating its bus service and labour contracts put a squeeze on cash.
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