American credit market outlook

Delphi Corp debt protection costs rose and its bonds fell on Friday following a report that concluded the company is more likely to file for bankruptcy than not and suggested recovery assumptions on the auto supplier's debt may be inflated.
"The possibility of a Delphi Corp bankruptcy-law filing remains more likely than not," wrote analysts including John Kollar at HSBC Securities in New York, on Wednesday. However, "it is impossible to know with any reasonable degree of certainty where negotiations stand."
Delphi said on Tuesday that the company needed to negotiate a rescue deal with unions and General Motors Corp by October 17, when there will be a change in US bankruptcy laws, or else file for bankruptcy.
The cost to insure the debt of Delphi for five years rose on Friday to around 26 percent of the amount insured as an upfront payment in addition to annual premiums of 5 percent, according to a broker.
Costs rose from around 25.25 percent upfront on Thursday and 23.5 percent upfront on Wednesday, with the 5 percent annual premium.
Delphi's 6.55 percent bond due 2006 fell to 76.75 cents on the dollar on Friday, amid heavy trading, from 78.75 cents on Thursday and 82 cents on Wednesday, according to MarketAxess.
The largest US auto parts supplier, spun off by GM in 1999, is in talks with GM and the United Auto Workers union about cutting costs and restructuring its North America operations.
Some credit derivatives traders are concerned that a bankruptcy filing by Delphi would pose the first large test to how credit derivatives contracts are settled, as it would be the first borrower with very liquid swaps to default.
Bonds of Delta Air Lines and Northwest Airlines rose marginally on Thursday, which some traders attributed to buyers of default protection in the credit derivatives market seeking debt to deliver in the contracts, following the filing of both airlines for bankruptcy on Wednesday.
Delphi bonds could undergo a larger squeeze if it defaulted on its debt, traders said.
"Delphi is a more meaningful credit to the overall credit default swap market than the airlines in terms of the total notional outstanding on the name," said Glen Taksler, credit derivatives strategist at Banc of America Securities in New York.
Delphi has a huge volume of outstanding protection in the single-name market, in addition to being included in derivatives indexes and a lot of structured credit trades, Taksler said.