The credit market turned against the American car industry this week, with the perceived creditworthiness of US car-widget-makers plunging at a faster pace than anything else overnight.
The cost of protecting the debt of TRW Automotive and American Axle against default jumped by about 100 basis points apiece in the US on Tuesday to 583bp and 899bp. Their spreads have more than doubled since May as record oil prices and tattered consumer confidence hit the industry.
S&P put the ratings of the Big Three US car-makers on “creditwatch negative” earlier this week as sales plummeted, particularly for profitable but gas-guzzling machines like SUVs. Their CDS spreads have all widened, not helped on Tuesday by data showing US consumer confidence is at its lowest since 1992. The percentage of people planning to buy a car within the next six months fell to 4.8% from 5.1%.
Over in Europe on Wednesday, the cost of protecting the debt of European car-makers fell back in line with the wider market, but they could soon become a target for investors wanting to bet that oil prices will stay high while macroeconomic conditions decline.
Indeed, Willem Sels at Dredner Kleinwort suggested just such a strategy to clients on Wednesday: “With higher input costs, weakening consumers, potential problems in the financing arms, and much weakness of their US counterparts, it seems spread widening is overdue.”
Trade was quiet in Europe on Wednesday, with the iTraxx Europe index of investment grade credits pulling back from the key psychological level of 100bp after a week of sharp gains. It shed 3.7bp to 95.1bp, while the iTraxx Crossover lost 8.2bp to 508bp.