Delphi Corp's bonds rallied on Friday, but then lost its gains amid speculation the company could potentially breach loan covenants, while spreads in the broader US corporate bond market ended unchanged.
While Delphi's stock price rose earlier in the session, its bonds ended largely unchanged on the day, a high-yield trader said. Analysts said the struggling auto parts supplier has certain debt-to-earnings requirements that it must meet for the third quarter ending Friday to comply with loan covenants. However, the potential breach may not be significant.
Delphi is seeking financial aid from its largest customer and former parent, General Motors Corp. The company has said it may file for bankruptcy protection if it does not receive help from GM, and concessions from the United Auto Workers union.
Delphi's 6.55 percent bond due 2006 was the most actively traded issue in the high-yield market. It rose in price to 74 cents on the dollar, up a cent and a half on the day, but down from its intraday high of 76 cents, according to MarketAxess. In fact later, after the market close, Delphi said it will make its scheduled monthly payments to suppliers and that it ended the third quarter with a cash balance in excess of $1.6 billion. Delphi said it chose not to make a voluntary repayment under its $1.8 billion revolving credit facility required to remain in compliance with a financial covenant so it could maintain added liquidity for its restructuring. Non-compliance on the loan facilities would prevent Delphi from obtaining further revolving credit facility advances, which it was not contemplating, but Delphi said it is looking into a waiver or adjustment to the covenant.
According the Merrill Lynch corporate bond master index, spreads have hovered in an 87- to 90-basis-point range over comparable Treasuries since August 29.
"In the coming weeks, spreads in the corporate bond market may see some volatility on lowered earnings guidance, but ultimately, we expect that they will grind tighter into year end given generally supportive technicals and fundamentals," said Ken Elgarten, US corporate strategist at UBS in Stamford, Connecticut.
Moody's Investors Service and Standard & Poor's cut Interpublic Group of Cos. Inc debt ratings after the company delayed earnings and said it would restate financials. S&P cut the world's third-largest advertising group's debt to deeper into junk territory to "B-plus," while Moody's cut the debt to "Ba1," the highest junk level.
Despite the ratings downgrades, spreads on Interpublic's 6.25 percent notes due 2014 narrowed on the day to 3.35 percentage points over Treasuries, from 3.53 percentage points, according to MarketAxess.
In the US Treasury market, debt prices fell as rising inflation and a sharp improvement in Midwest business conditions reaffirmed the likelihood of further interest rate hikes. The benchmark 10-year Treasury note fell 8/32 to yield 4.33 percent.
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