General Motors Corp's bonds rallied on Wednesday, and the cost of insuring its debt against default fell sharply, hitting its lowest level in nine months, after the US automaker reported forecast-beating second-quarter results.
Five-year credit default swaps on General Motors fell around 50 basis points to 700 basis points, traders in London said, meaning it costs 700,000 euros a year to insure 10 million euros of GM's debt against default.
GM reported a larger-than-expected profit of $2.03 a share excluding charges and said it would make $6 billion in cost savings this year, up from the previously announced $5 billion.
"It's not often that we would use the words excellent and General Motors in the same sentence but we feel GM's Q206 performance fits the bill this time compared to the dismal cash burning performances of the last few quarters," credit analysts at Commerzbank in London wrote in a note to clients.
But they warned the results remained "a side-show" with the prospect of an unresolved work stoppage at Delphi Corp, a bankrupt former GM subsidiary, that could derail the sale of a stake in financing unit General Motors Acceptance Corp (GMAC).
"Though these are undeniably good results, they will still matter little if GM isn't able to avoid a long strike at Delphi, which will likely shut down its operations and threaten the sale of GMAC," they wrote. GM's 8.375 percent euro bond due 2033 rose 2 percentage points to be bid at 84 percent of face value, one trader said, while default swaps on GMAC also tightened.
Default swaps on Ford Motor Co's finance arm, Ford Motor Credit Corp, rallied too, the trader said, falling 10 basis points to 430 basis points. GM's credit ratings were cut to "junk" in May 2005 and have since fallen further. GM now has a corporate family rating of B3 from Moody's Investors Service, a corporate credit rating of B from Standard & Poor's and an issuer default rating of B from Fitch Ratings.
Elsewhere, the cost of insuring Portugal Telecom's debt against default rose again, ahead of quarterly results from Sonaecom, which is hoping competition authorities will approve its 11.1 billion euro take-over bid for PT. "People are expecting Sonaecom to announce more details on what will happen with the LBO (leveraged buyout) when they report their results tomorrow," a telecoms trader said.
Five-year credit default swaps on Portugal Telecom widened 8 basis points to be bid at 180 basis points, he said. Credit default swaps on BT Group were unchanged at 54 basis points after S&P cut BT's credit rating one notch to BBB+. "The downgrade just brings S&P's rating in line with Moody's and Fitch," a second telecoms trader said.
In the wider market, the iTraxx Crossover index, made up of mainly "junk"-rated credits, edged 3 basis point tighter, to be bid at 274 basis points, an index trader said. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 54.1 basis points more than similarly dated government bonds at 1459 GMT, 0.2 basis points more on the day.
FORTESCUE PLANS BOND: In an otherwise quiet primary market, Australia's Fortescue Metals Group Ltd plans to issue $1.9 billion worth of senior secured notes to help finance iron ore mining, an official at sole lead manager Citigroup said. The notes, to be issued via FMG Finance, will be denominated in dollars and euros, the official said. Final maturities have not been decided but are likely to be seven or 10 years, he said.
Roadshows began on Wednesday in Asia, and move to Europe early next week and then on to the United States, the official said. Fortescue will use the proceeds to finance its iron ore mining business in Western Australia.
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