From the Junk In The Trunk dept...
Standard & Poor's rocked the bond markets last week with its simultaneous downgrades of the corporate debt ratings of both General Motors and Ford Motor Co. into speculative grade territory, and while the move was widely expected, sources say it came sooner - and in the case of GM, more drastically - than expected. General Motors and GMAC were downgraded two notches to BB,' while Ford was downgraded one notch to BB+.' The news came shortly after word hit the market earlier in the morning that Ford had stopped issuing ABCP.
"People were not expecting this to happen so soon," said one ABS analyst. On a conference call, unsecured debt analyst Scott Sprinzen said there was no specific event or catalyst that caused S&P to take action now. There was "nothing magical about today," said Sprinzen during the question and answer period of the call. He said S&P has had ample time to digest the companies' first quarter results, and that the downgrades were the product of months of deliberations. Both companies remain on negative ratings watch.
In the ABS secondary market, trading in GM, GMAC and Ford ABS came to a halt when news of the downgrades became public. "The fact that GM and Ford are now below investment grade servicers hasn't caused selling of senior or subordinate classes," said Peter DiMartino, head of ABS and mortgage credit strategy at RBS Greenwich Capital.
"Expect some spread widening, particularly in the floorplan and rental fleet deals related to each company," said Barclays Capital analyst Joe Astorina upon hearing the news. Shortly after the downgrades, trading desks reported that the most recent dealer floorplan ABS to price from GMAC, SWIFT 2005-A11 three-year senior A class - which priced Feb. 17, at 12 basis points over one-month Libor - was bid at a quoted 37 basis point discount margin to Libor, although no trades had been confirmed.
Auto loan transactions saw no weaker bids in the secondary market and "this is not an issue of deteriorating auto [loan] ABS credit," noted RBS Greenwich's DiMartino, adding that, "it is one of supply/demand technicals. The question of wider auto ABS spreads rests on the perception of even greater term ABS supply from Ford and GM and the market will find a new equilibrium point for those technicals."
As for the reason behind the two-notch downgrade of GM, S&P's Sprinzen noted the company's particularly poor financial performance. "The deterioration in financial performance has been precipitous. They've really had some setbacks in the North American market," he said. "Looking at the challenges they face, we felt a two notch adjustment was in order," he concluded.
Reports surfaced after Thursday's market close of GM's 6.75% notes due 2014 cheapening nearly 100 basis points to 550 basis points over Treasurys on a 81.5/82.5 bid/ask. Ford 7% notes due 2013 widened to 455 basis points over Treasurys on a 89.5/90.5 bid/ask. The Dow Jones Industrial Average - of which both companies are included - plummeted roughly 80 points from 12:30 p.m. to 1:30 p.m. EDT, around the time when the news hit the market, but gained back a good portion of those losses throughout the day, closing just 35 points down on the session. GM stock fell $1.94 while Ford equity closed down just $0.46. - GC/KD
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