Standard & Poor's sent a shudder through the corporate bond market Thursday when it cut the credit ratings of US auto giants General Motors Corp and Ford Motor Co and their huge finance units, which together have combined debt close to half a trillion dollars.
The ratings on GM and General Motors Acceptance Corp were cut to double-B, or two notches below S&P's lowest investment grade, while the ratings on Ford and Ford Motor Credit Co were cut to double-B-plus, or one notch below investment grade. The agency assigned a negative outlook to both ratings.
In both cases, S&P cited questions about the strategies the two largest US auto makers are employing to persevere over their sliding sales, particularly in North America.
"After the downgrade there was a few minutes of silence, followed by 15 minutes of mayhem," said Michael Fuhrman, product manager at GFI in New York, an inter-dealer brokerage in credit derivatives.
GM's 8.375 percent bonds due 2033 fell US$5.50 to US$73.50 per US$100 in face value, yielding 11.573 percent, according to MarketAxess, an electronic trading system for corporate bonds. A bond trading below US$80 per US$100 in face value is generally considered to be "distressed."
GMAC's 6.75 percent bonds due 2014 were US$4.75 lower at US$81 per US$100, to yield 9.864 percent, while Ford Motor Credit's 7 percent bonds due 2013 were US$1.875 lower at US$90.50 per US$100, yielding 8.612 percent.
Trade was erratic in both companies' bonds with many investors taking to the sidelines to wait out the pandemonium.
S&P's downgrades were "a shocker," especially the Ford action, said Melissa Weiler, portfolio manager at Los Angeles-based Trust Co of the West, which has a little more than US$4 billion in high-yield bonds under management -- including some GMAC bonds.
Initially, the market "sort of froze," she said, and then the bonds began sinking with quotes "all over the place."
Call it "Black Thursday," Weiler said.
Ironically, both the high-yield and the investment-grade corporate bond markets had been enjoying gains that began on Wednesday after billionaire investor Kirk Kerkorian said he plans to raise his equity stake in GM to just under 9 percent.
The prospect of a hard-nosed investor taking charge at GM had lifted auto bonds and buoyed other sectors after weeks of jittery trading.
"Almost everyone expected GM to get downgraded," said Gregory Peters, credit strategist at Morgan Stanley. "But the timing and the severity is what caught people off guard."
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