General Motors? bondholders were rattled further on Tuesday by news that GE Capital was in the process of winding down a $2bn loan facility to the carmaker and its suppliers.
Later, GE and GM issued a joint statement clarifying their position. They said the facility had not been dropped suddenly and that GE had decided last May to exit the trade payables business.
On Monday, GM announced that GMAC, its financing arm, would be offering a similar early payment programme to its suppliers.
Early in US trade, bond prices fell sharply, pushing yields higher. But by mid-afternoon, trading was choppy and prices swung wildly in what dealers described as ?illiquid? trading conditions. Some reported bonds being quoted in price terms, customary for the high-yield market, rather than in terms of yield spread over Treasuries, typical in the high-grade sector.
?The statement may at least ameliorate some of the psychological concern in the market,? said Sean Callow, strategist at IDEAGlobal. ?But any help will probably be only at the margins, and GM credit spreads are likely to remain in the spotlight.?
Money managers said longer-term investors were waiting for the dust to settle. GM, together with its financing arm GMAC, is one of the largest corporate borrowers. Its bonds have been particularly volatile for the past week after it issued a profits warning and was downgraded by Fitch Ratings.
Last week, Fitch downgraded GM and GMAC to BBB-, the same as Standard & Poor?s and one notch above speculative grade, or junk, status. If GM was downgraded to junk, many fund managers would be forced to sell the paper, while the sheer amount of debt would have a material impact on the high-yield sector. Moody?s Investors Service rates GM one notch higher at Baa2, and GMAC one higher still at Baa1.
?A GM downgrade could come sooner rather than later, and people are waking up to that,? said John Tierney, head of credit derivatives research at Deutsche Bank in New York. ?A lot of people had been thinking a downgrade to junk was probably an event for the first half of 2006, and GM would have time to come out with new models, a chance to improve and push the scenario off for longer.?
Some were betting that while GM might be downgraded, GMAC, which issues the bulk of the debt, might retain investment grade. Credit default swaps on the two have widened sharply, but those on GM itself have widened far more, implying investors feel GMAC is a better risk. According to broker-dealer GFI, the difference between the two is about 105 basis points, from 79bp last month and 46bp at the beginning of the year.