Bonds: GM and Ford buffeted in thin holiday market

22 Dec, 2005

US automakers came under renewed pressure in the European credit market on Wednesday, although there was little other action, with price quotes few and far between as Christmas drew closer.
Credit default swaps on General Motors Acceptance Corp (GMAC), the financing unit of troubled auto giant General Motors, bounced around, buffeted wider first by news that billionaire investor Kirk Kerkorian had sold 12 million shares in GM, but then recovering on hopes for the sale of GMAC.
The Wall Street Journal, citing people familiar with the matter, reported several groups of financial and private-equity players had emerged as early suitors in the GMAC auction.
GM has said it plans to sell a controlling stake in GMAC to a highly rated buyer in order to return the financing arm to investment-grade status. Five-year default swaps on GMAC initially widened to as much as 480 basis points, a banker in London said, before retracing to 465 basis points, about 10 basis points more on the day.
The price means it costs 465,000 euros a year to insure 10 million euros of the company's debt against default.
The news hit Ford, too, with Ford Motor Credit default swaps some 30 basis points wider at 587 basis points.
Analysts at Dresdner Kleinwort Wasserstein emphasised that Kerkorian's decision to sell was driven by tax considerations.
"Fears that Kerkorian has lost confidence in GM are overdone in our view," they wrote in a note to clients.
In the wider market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 44.5 basis points more than similarly dated government bonds at 1455 GMT, 0.3 basis points more on the day.
Moody's Investors Service said it may cut its Baa1 credit rating on Degussa, after German mining group RAG moved to take full control of the German specialty chemical maker.
On Monday RAG, which owns 50.1 percent of Degussa, said it would buy the 43 percent stake in the company held by utility E.ON, for about 2.8 billion euros ($3.3 billion). RAG will also offer to buy the outstanding 7 percent of shares held by minority shareholders, Degussa said.
Moody's said it would review its rating, currently at the third-lowest level of investment grade, for a possible downgrade, and was worried about the potential sale of Degussa's construction chemicals business.
"Notwithstanding the effects of a greater integration of Degussa within the RAG group going forward, Moody's believes that the sale of the group's leading and relatively stable Construction Chemicals business without any concomitant material reduction of its debt, would likely result in a weaker credit profile for Degussa that would no longer be commensurate with a Baa1 rating," the rating agency said in a statement.
Degussa has said it could consider a sale of the business, which analysts say could fetch about 1.8 billion euros. That would ease RAG's purchase by raising funds that could be paid to the mining group as dividends.
Degussa's debt, which has widened markedly in anticipation of a take-over, showed little reaction in thin pre-holiday trade, a dealer said. "They are priced anyway at the BBB-, BB+ level," he said.
Five-year credit default swaps on Degussa stood unchanged at 135 basis points on a mid-price level.

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