Bonds of General Motors pared losses in late trade on Wednesday but were still down after reports that its bankrupt former unit Delphi Corp had a $11 billion hole in its pension fund.
Buyers stepped in to buy GM's 8.375 percent euro bond due in July 2033 as it traded 2 percentage points lower at 72 percent of fact value, a trader said. The bond has fallen almost 10 percent in a few days.
Pensions at bankrupt auto parts supplier Delphi are underfunded by an estimated $10.8 billion, the federal agency that insures corporate retirement accounts said on Tuesday. That is a sharply higher estimate than Delphi's latest figure of $4.3 billion at the end of 2004.
Delphi filed the biggest bankruptcy petition in US automotive history on Saturday. The company has been hurt by high wage and benefit costs and lower demand for its parts.
GM spun off Delphi in 1999 and may be called to back some benefits. The automaker says its range of exposure under guarantees it made to Delphi extends from "no material impact" to $11 billion. Meanwhile speculation continued that General Motors was seeking to separate itself from General Motors Acceptance Corp (GMAC), its financing arm.
"We are seeing the two credits trading further and further apart. I am sure they are going to split," said one trader in London.
Five-year protection on GM traded 50 basis points wider late on Wednesday at 960 basis points, said a trader in London, while GMAC default swaps were 10 basis points wider at 550 basis points. At its wide point on the day, GM hit 1020 basis points.
Standard & Poor's on Monday lowered its ratings on General Motors Corp by one notch to BB- and said it might cut them again. But it left GMAC unchanged at BB with developing implications, fuelling speculation the company may restructure to separate financing and manufacturing.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 37.8 basis points more than similarly dated government bonds at 1445 GMT, 0.1 basis points wider on the day.
Bonds of Ford weakened in sympathy with GM, a trader said. The company's 4.875 percent euro bond due in January 2010 was 1 percentage point lower bid at 92 percent of face value.
The iTraxx Crossover index, used as a barometer of sentiment in the high-yield market, was trading at 302 basis points, little changed on the day, another trader said.
"At the moment we are seeing much bigger moves on the cash bonds than the indexes," he said. "Cash is definitely underperforming."
Most of the market was weaker on Wednesday, the trader said, as worries over GM sapped confidence, pushing many high-yield credits 1 or 2 points weaker.
Rhodia's 8 percent note due in January 2010 was bid 2 basis points lower at par, the trader said.