At least six CDOs are at risk for a downgrade following the troubled auto parts supplier Dana Corp.'s bankruptcy filing on March 3.
On the cash side, the filing and subsequent corporate credit downgrading of Dana has caused a ripple effect primarily within high yield bond CDOs.
According to Fitch Ratings, the total portfolio exposure to Dana throughout the global CDO market is roughly $1.97 billion. Within the U.S. market, the rating agency found that 177 tranches in 42 deals - 28 synthetic and 149 cash flow - are impacted. In the European market, 31 tranches in 18 deals, 30 synthetic and one cash flow, are impacted. Fitch placed four tranches from three public CDOs and 13 tranches from three private CDOs on rating watch negative.
Those synthetic CDOs with exposure to Dana that are not currently on the watch list for a rating downgrade are anticipated by Fitch analysts to have enough credit enhancement to support losses from Dana. Fitch applied a 40% recovery rate assumption to Dana's senior unsecured debt, slightly lower than the recovery rate assumption announced this month for General Motor Corp.'s senior unsecured debt.
Of the static synthetic CDO deals rated by Fitch, those exposed to the automobile industry represent 6.06%, and more than half of those are U.S. deals.
Fellow auto parts manufacturer Delphi Corp. has also filed for Chapter 11 bankruptcy protection. Delphi and Dana make up 0.61% of total exposure to the auto industry, according to Fitch data.
Most cash CDOs with exposure to Dana have already suffered downgrades, and the auto parts supplier's downgrade alone may not be enough to cause more, Fitch found, because of excess spread accumulation and deleveraging within those transactions.
According to Standard & Poor's, the effect of Dana's bankruptcy on global synthetic CDO ratings should be "limited." The company found the name is referenced in some 315, or 13%, of all rated synthetic CDOs, but that the downward rating spiral of the company's corporate credit standing has already taken much of its toll on existing CDO ratings. The rating agency estimated that a quarter of exposed synthetic CDOs would endure a tranche downgrade from Dana exposure. S&P placed 11 tranches from nine synthetic CDOs on watch. S&P found 91 U.S. synthetic CDOs that referenced Dana, but those transactions most likely to receive downgrades have been hurt by additional corporate credit events, S&P said last week.
Moody's Investors Service pointed out that CDOs holding bonds are more likely to have a greater exposure to Dana Corp. than those holding loans because loans are more likely to be paid than bonds in a bankruptcy. Moody's found 120 of its rated U.S. CDOs with exposure to Dana; 96 of those are cash while 24 are synthetic. Overall exposure to the ailing auto parts supplier as a proportion of overall individual CDO portfolios ran from 0.02% to 4.3%.
The filing comes amid an increasingly challenging environment for the U.S. auto industry, which has buckled under pressures for lower pricing and lucrative underwriting terms. GM's corporate credit rating was recently downgraded by Fitch Ratings.
Also, auto supplier Visteon Corp. has lost money each year since 2000.
Trouble within the auto parts suppliers could have negative implications for Ford Motor Company and GM due to a potential bottleneck in receiving crucial parts and through an expected drain in cash.
Fitch earlier this month gave GM's senior unsecured debt a 41% recovery rating (ASR, 2/5/06). The rating agency simultaneously lowered the auto company's issuer default rating another notch to B' from B+'. The rating agency's analysts said the failure of GM's suppliers to provide trade credit - or a failure to avoid a prolonged strike by Delphi employees - would likely be enough to push the company into bankruptcy. GM announced last week it would sell 17% of its stake in Suzuki Motor Corp., a plan that should deliver $1.96 billion.
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