Debt in General Motors Acceptance Corp (GMAC) rallied on Monday, after struggling parent GM agreed to sell a majority stake in the finance unit for $14 billion to a consortium led by hedge fund Cerberus Capital Management.
The long-awaited deal will generate much-needed cash for the world's largest automaker, and GM also hopes it may help restore GMAC's credit rating to investment grade.
General Motors, one of the world's biggest corporate borrowers, sent shockwaves through the credit markets when it fell to "junk" last year.
Most of the group's debt is issued through GMAC, and GMAC also plays a part in many derivative instruments, such as synthetic collateralised debt obligations (CDOs).
"It's something that people have been waiting for a long time, and now it appears to be a reality," said Kit Juckes, head of fixed income research at Royal Bank of Scotland in London.
Five-year credit default swaps on GMAC fell sharply to be bid at 295 basis points, one trader in London said.
That price means it costs 295,000 euros a year to insure 10 million euros of the company's debt against default, and contrasts with 450 basis points as recently as last Wednesday.
GM's 8.375 percent euro bond due in July 2033 rose one percentage point in price, bid at 73.5 percent of face value, the trader said, while the cost of insuring rival Ford's Ford Motor Credit arm against default dropped.
"The terms of the transaction are in line, if not marginally better than what could have been expected in the circumstances, which include GM, despite its protestations to the contrary, being factually a forced seller," analysts at Royal Bank of Canada in London said in a note to clients.
GM said it expected the sale to the Cerberus-led group, which also includes the private equity unit of Citigroup and Japan's Aozora Bank Ltd, to close in the fourth quarter.
Reaction from rating agencies was mixed, with both Moody's Investors Service and Fitch Ratings warning that GMAC's ongoing links to GM could hamper its attempts to shed a "junk" credit rating.
Moody's said it might still cut its Ba1 rating on GMAC and said maintaining the rating, one level below investment grade, would be the "best-case rating outcome" when the sale closed. GM's credit profile would need to stabilise or improve before GMAC could move out of "junk" status, Moody's said.
Fitch said it could raise its BB issuer default rating on GMAC, which is two notches below investment grade, but warned that GM brought extra risks not generally seen with investment-grade borrowers.
Standard & Poor's said it was likely to raise its rating on GMAC one notch to BB+, the highest "junk" rating, but said GM's B rating remained on review for a downgrade.
In the wider market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 48.2 basis points more than similarly dated government bonds at 1451 GMT, 0.1 basis points less on the day.
Swiss-Swedish engineering firm ABB rallied after it regained an investment-grade rating from S&P, as it finalised a reorganisation plan for US unit Combustion Engineering, capping asbestos claims.
Five-year default swaps on ABB fell some 5 basis points by 1430 GMT to 55 basis points, another trader said.