The cost of credit protection on General Motors fell on Friday, paring recent rises, as investors ratcheted up expectations the company will split its financing and auto arms, helping protect bondholders from further coruscating losses.
Standard & Poor's on Monday lowered its ratings on General Motors Corp by one notch to BB-, citing the bankruptcy filing of GM's largest supplier, Delphi Corp, but left GMAC unchanged at BB with developing implications, fuelling speculation the company may restructure.
Default swaps on GM and GMAC were marked tighter on Friday. Five-year protection on GM traded 50 basis points tighter than its wide level, bid at 905 basis points, said a trader in London, while GMAC default swaps were as much as 100 basis points tighter at 510 basis points.
The spread between the two has widened from around 125 basis points a week ago to around 400 basis points in recent trading, according to one trader.
The General Motors 8.375 percent euro bond due in July 2033 traded at 73.75 percent of face value, said a trader, marginally better on the day, but down from as much as 78.5 percent a week ago.
The world's largest car maker lost $2.5 billion in its North American operations in the first half of this year, and under Delphi's 1999 spin-off terms the car maker may be liable for pension and retiree benefits for Delphi's United Auto Workers union members.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 38.3 basis points more than similarly dated government bonds at 1500 GMT, 0.2 basis points more on the day, and 1.2 basis points more since Monday opening.
The iTraxx Crossover index, used as a barometer of sentiment in the high-yield market, was trading at 316 basis points late on Friday, about five basis points tighter on the day, and around 17 basis points wider on the week.
The market was also boosted on Friday, a trader said, after a US index of core consumer prices rose less than expected.
US inflation outside of food and energy rose 0.1 percent for the fifth straight month in September, the Labour Department said, offering some hope a broad inflation increase could be averted.
Prices for US government bonds rose and the value of the dollar slipped as traders viewed the mild rise in core inflation as likely limiting how far the Federal Reserve will need to push up interest rates to curb inflation.
Elsewhere, the cost of insuring debt of Hilton Group against default jumped almost 50 percent after the UK hotels and gambling company said it was in talks to sell its hotels to US Hilton Hotels Corp.
Default swaps on the UK company leapt on uncertainty over bondholders' position were a sale to go ahead, which industry sources said would be a 3.6 billion pound ($6.3 billion) cash deal, reuniting the Hilton brand after 41 years.
Five-year credit default swaps on Hilton Group leapt 30 basis points, bid at 95 basis points, a dealer said. That 46 percent price rise means it costs 95,000 euros a year to insure 10 million euros of the company's debt against default.
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