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Auto CDS Tighten As Delphi Strike Picture Brightens

The credit default swaps of several auto companies tightened on the expectation that Delphi Corp. will avoid a strike with its union, the United Auto Workers.

The credit default swaps of several auto companies tightened on the expectation that Delphi Corp. will avoid a strike with its union, the United Auto Workers. A strike would cause serious disruption at General Motors Corp., which relies on Delphi for auto supplies. GM's five-year credit default swaps tightened three points to 15+500, according to a trader. Underscoring what a knock-on effect GM has on all auto credits, all five of the biggest advancing CDS in Markit's weekly chart were auto sector names (see chart, page 4). In addition to GM, Ford Motor CDS tightened 48 basis points to 881, American Axle & Manufacturing CDS tightened 42 basis points to 391; Goodyear Tire & Rubber tightened 40 basis points to 273; and Visteon Corp.'s CDS also tightened 69 basis points to 573 (see related story, page 6).

"GM is such a bellwether credit," said Gavan Nolan, credit analyst at Markit, noting the movement of the other auto sector names. GM's bonds also traded up to their highest levels in seven months. GM's '33 bonds were up two-and-a-quarter points to 75 3/4. A trader said he had not seen the bonds reach this level since GM announced its plans to sell its finance arm General Motors Acceptance Corp. last October. The trader said there are a lot of shorts on the name, which have boosted trading levels. Delphi's bonds also traded up five to six points. Its 6 1/2% '09 bonds increased five points to 79 1/2, while its 6 1/2% '13 bonds traded up five points to 77.

At the end of March, Delphi asked the bankruptcy court in New York to cancel its labor contracts with the UAW and its other unions. UAW Vice President Richard Shoemaker advised all UAW local unions representing workers at Delphi facilities to schedule a strike authorization vote in early May, which must be completed no later than May 14. A UAW spokesman said the union hopes a resolution can be achieved without a strike, but that it does not rule out a strike. He added that negotiations continue with Delphi, but since Delphi filed bankruptcy motions, few negotiations have taken place. "The UAW has been consistent and clear that if the situation gets to the point where the bankruptcy court rules in favor of Delphi's motions and voids our contract, a strike would be inevitable," he said. A spokesman for Delphi did not return calls.

If a strike does happen, its scope and duration would be the critical factors in determining how steep the downside would be for auto sector names. "If it is national strike it will be devastating to everyone," a trader said. " If it is just wild cat strikes, the widening would be muted, but auto parts and autos will definitely underperform the rest of the market." Nolan added that GM would only likely be pushed into bankruptcy if a strike were drawn out. "GM has a fairly big liquidity cushion," he noted. He added companies generally show signs of being close to bankruptcy when their CDS reaches 2000 basis points. The CDS of Dana Corp., for example, which went bankrupt in March, widened to 32.5+500 just before it filed. The spread of GM's CDS is around 982 basis points, according to Markit.

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