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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (31862)	5/5/2005 4:48:31 PM
From: ild	Read Replies (1) \| Respond to of 110194

NEW YORK (Dow Jones)--Standard & Poor's rattled financial markets on Thursday with its decision to downgrade U.S. automakers General Motors (GM) and Ford (F) to high-yield status, a move that even if telegraphed stunned investors. S&P said it slashed the debt ratings of about $291.8 billion issued by General Motors and its financing arm, General Motors Acceptance Corp. two notches to double-B from triple-B-minus. The ratings agency also cut the ratings of $161 billion in debt issued by Ford and its financing arm, Ford Motor Credit Co., one notch to double-B-plus from triple-B-minus. S&P said the rating outlook on both automakers, long held as icons of the U.S. economic might, is negative. In both cases, Standard & Poor's cited questions about the strategies the two largest U.S. automakers are employing to persevere over their sliding sales, particularly in North America. The reaction in the U.S. financial markets was swift. GM and Ford are among the largest issuers of debt. The Dow Jones Industrial Average flipped from positive to negative territory on the news with GM stocks falling 1.65, or 5% and Ford, dropping 50 cents, also 5.0%. The sharp drop in GM comes after its stock saw its biggest gain in decades Wednesday following news that billionaire investor Kirk Kerkorian, who once led a hostile takeover bid at Chrysler Corp., placed a big bet on a turnaround at GM. His investment company, Tracinda Corp., said Wednesday it will offer about $868 million, or $31 a share, for 28 million shares of GM, or nearly 5% of the total shares outstanding. S&P acknowledged Kerkorian's offer Thursday, saying it represented an "additional uncertainty," but it "was not a factor at all" in its decision to downgrade the company's debt ratings. The shockwaves sent investors scrambling into the Treasury market, which was still reeling from this week's meeting of the Federal Open Market Committee and the unexpected announcement from the U.S. Treasury Department that it is considering reissuing the 30-year bond. Treasurys represent the financial markets' safest haven during periods of uncertainty. DA Davidson's Mary Ann Hurley said the buying of Treasurys after the S&P downgrades reflected a flight-to-quality bid for investors that seemed caught by surprise. "The downgrade came a little bit before the Street was looking for it," she said. As expected, investors immediately started to unload the debt of both companies. GM's 8.375% bonds due 2033 were quoted four points lower at 75, or 75 cents on the dollar, in active trading, according to MarketAxess, an electronic trading system for corporate bonds. Ford Motor and its Ford Motor Credit Co. finance unit's bonds were down anywhere from five to eight points at around 80 cents on the dollar. Bonds that trade at these levels are generally considered in distress. The aftershocks were felt in other areas of the credit markets. "After the downgrade there was a few minutes of silence, followed by 15 minutes of mayhem," in the trading of credit default swaps said Michael Fuhrman, a product manager at GFI in New York. Ford and GM's five-year credit protection was last being quoted at annual premiums of $540,000 and $850,000 for protection on a portfolio of $10 million, he said. These are out from early session levels of $435,000 and $745,000 respectively. Small trades of less than $5 million have been going through the market and after the downgrade news broke, five-year protection on GM was initially offered at $990,000 for a portfolio of $10 million but it didn't trade, said a trader. Agencies And Mortgages Feel The Pain Meanwhile in agencies, earlier gains quickly eroded in the face of the downgrades, although the risk premiums on most benchmark bonds were flat on the day. "What happens when credit concerns become very acute is that everything becomes very highly correlated, with the exception of Treasurys," said Bill Prophet, agency and Treasurys strategist at UBS in Stamford, Conn. Risk premiums on mortgage debt, meanwhile, also fell after the GM and Ford downgrades to junk, with spreads moving from 0.02 percentage point tighter versus the Treasury curve to flat on the day. Emerging market debt spreads also widened immediately after the downgrade. The spread on the 18-country JP Morgan EMBI+ widened about 0.10 percentage point after the GM and Ford downgrade to 3.83 over Treasurys. The prospect of so much debt moving into the high yield market has raised concerns that there could be less demand for high-yielding emerging market debt. Currency markets seemed the least affected by the downgrades. The dollar dipped initially against the euro and the yen but it recovered by mid afternoon Thursday.