US corporate bonds: spreads steady to tighter

09 Nov, 2008

Credit bond spreads were steady to tighter on Friday as auto bonds weakened after General Motors Corp and Ford Motor Co reported quarterly losses that were worse than expected. Overall corporate bond spreads were tighter, while the main index of investment-grade credit default swaps narrowed to about 191 basis points on Friday from 195 basis points on Thursday, according to data from Markit Intraday.
GM and Ford bonds weakened as their stocks tumbled following news that the two collectively burned through $14.6 billion in cash in the quarter as they ran up bills related to restructuring actions and as they face a deepening global financial crisis.
GM's stock fell as much as 16.3 percent to a session low at $4.02; at the close, GM was at $4.36, down 9.2 percent. Ford's stock slid as much as 7.1 percent to a session low at $1.84, only to reverse course and end up 2 percent, or 4 cents, at $2.02 on the New York Stock Exchange.
General Motors also indicated it had set aside consideration of an acquisition of smaller rival Chrysler - without mentioning the company's name - saying it was focused on cost-cutting and other steps to free up $20 billion in liquidity through 2009. "GM's October sales are down a sobering 47 percent," Egan-Jones Ratings said in a report. "GM has few alternatives."
GM's 8.375 percent bonds maturing in July 2033 fell 3.3 cents on the dollar to 25 cents, pushing the yield up to about 33 percent, a distressed level indicating traders' views of the company as a high default risk.
Ford's 7.45 percent bonds due in 2031, little changed on the day, have fallen to about 28 cents on the dollar versus about 35 cents at the end of September. The automaker posted a $2.98 billion quarterly operating loss and said it would cut salaried expenses by another 10 percent. Analysts had expected Ford and General Motors Corp to post losses of roughly $2 billion each for the third quarter, excluding one-time items, according to Reuters Estimates.
Standard & Poor's on Friday afternoon also cut GM's rating deeper into junk by one notch to "CCC-plus," seven levels below investment grade. US President-elect Barack Obama, facing what he called the "greatest economic challenge of our lifetime," met economic advisers on Friday and said the country can succeed in coping with economic challenges, but it won't be a quick or easy fix. New US jobless figures underlined the enormity of the task confronting him to stabilise an economy that is shedding jobs fast. Job losses in October were worse than feared, with employers cutting payrolls by 240,000.
"We are in a hole," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. "So the question is: 'Does Barack Obama have the right shovel to dig us out of a hole?' The market is questioning that and they are hedging that he doesn't."
Diageo Capital Plc sold $500 million of five-year bonds on Friday in a reopening of a five-year issue from October 16, according to IFR, a publication of Thomson Reuters. Friday's sale was increased from an original $300 million and priced at 101.967, to yield 6.905 percent, or a spread of 435 basis points over comparable Treasuries.
Diageo sold $1 billion of the notes in October at 462.5 basis points over Treasuries. The notes traded last at 374 basis points, according to MarketAxess. Bonds sold by BP Capital Markets Plc, a unit of BP Plc, were among the most actively traded, giving up some gains after rallying on Wednesday.
The company sold $3 billion of five-year senior notes a day earlier. Spreads for BP Capital Market's 5.25 percent notes due in 2013 narrowed about 2 basis points to 272 basis points, according to MarketAxess data, after pricing on Tuesday at a spread of 275 basis points more than Treasuries.

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