US corporate bond prices weakened on Friday as concerns about automakers, financial firms and bond insurers resurfaced, dampening demand for riskier company debt.
Standard & Poor's on Friday said it may cut its ratings on Ford Motor Co, General Motors Corp and Chrysler LLC, citing financial damage resulting from high gasoline prices. Auto credit spreads widened on the announcement.
Moody's Investors Service also late on Thursday stripped the insurance arms of Ambac Financial Group and MBIA Inc of their "Aaa" ratings, citing their impaired ability to raise capital and write new business.
Moody's said earlier this month it was likely to cut the ratings of Ambac Assurance Corp and MBIA Insurance Corp as plunging share prices and the high cost of accessing the debt markets made it challenging for the two largest bond insurers to raise new capital.
S&P cut top ratings of both insurance arms on June 5. "With the rating cuts by most firms, new business is highly problematic and MBIA's future is doubtful," according to Egan Jones Ratings. MBIA said Moody's action will give some holders of guaranteed investment contracts the right to terminate the contracts or to require that additional collateral be posted. The company said it has "more than sufficient" liquid assets to meet those requirements.
The cost of insuring the debt of the insurance arms of Ambac Financial Group and MBIA Inc rose on Friday. Five-year protection costs on MBIA Insurance rose to about 38.5 percent on an upfront basis, plus 500 basis points in annual premiums. That was up from 31.5 percent upfront plus 500 basis points on Thursday, according to data from Phoenix Partners group. That means it costs $3.85 million upfront plus $500,000 annually to protect $10 million of debt for five years. Ambac Assurance's credit protection costs rose to 38 percent upfront plus 500 basis points a year, up from 32 percent upfront plus 500 basis points on Thursday, according to Phoenix Partners Group data.
AUTOMAKERS Bonds of automakers also weakened as Ford said on Friday that it would cut output and delay a new version of its top selling truck due to a deepening slump in US sales. The company said it would be difficult to avoid a loss in 2009, a more pessimistic view than the company offered only a month ago.
Ford's 7.45 percent notes due in 2031 fell almost 3 cents on the dollar to about 63 cents, yielding 12.3 percent. General Motors Corp's 8.375 percent notes due in 2033 fell about 1 cent on the dollar to 66 cents to yield almost 13 percent, according to MarketAxess data.
Ford and GM's financial arms may need to write down $1.1 billion and $1.5 billion, respectively, said a Lehman Brothers analyst. The weakening used-vehicle market creates a growing problem for the financial arms of GM and Ford as residual values of lease vehicles are likely to be significantly lower than originally expected, analyst Brian Johnson said.
"This is especially true for traditional trucks, which have been disproportionately hurt by the accelerating mix shift towards more fuel-efficient cars," Johnson said. Surging oil prices also are driving the US auto market to near-decade lows and forcing Americans to avoid trucks and sport utility vehicles in favour of more fuel-efficient cars.